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Bank of Canada keeps interest rate at 1.75%

08 December 2018

The 2015 oil-price crash contributed at the time to a slight, technical recession and prompted the central bank to cut interest rates to boost Canada's economy - twice.

When the central bank hikes its rate, it makes borrowing more expensive - but it's good news for savers.

Despite the hold, the central bank plans to continue the gradual tightening initiated in 2017. Swaps trading suggests the Bank of Canada will cap its hiking cycle at no more than 2.25 percent, below its estimate of a "neutral" range for rates of between 2.5 percent and 3.5 percent.

The persistence of the oil price shock, the evolution of business investment, and the Bank's assessment of the economy's capacity will also factor importantly into our decisions about the future stance of monetary policy.

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"Now, they're not sure anymore", Lavoie said in an interview.

TD senior economist Brian DePratto wrote about Wednesday's rate decision in a research note: "To be sure, while everything points to a January hike being off the table, the path thereafter is less clear, and a 491-word statement does not give much to work with".

Oil prices have fallen sharply since the October Monetary Policy Report (MPR), reflecting a combination of geopolitical developments, uncertainty about global growth prospects, and expansion of US shale oil production.

The bank's rate directly affects the rates that Canadian consumers get from retail banks. Benchmarks for western Canadian oil - both heavy and, more recently, light - have been pulled down even further by transportation constraints and a buildup of inventories.

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In the speech Thursday, Poloz said the data since October has been "on the disappointing side" and that the economy has less momentum heading into the final three months of 2018 than the bank believed it would. Weaker oil prices and associated production cutbacks mean activity in the energy sector is set to be materially weaker than expected.

The bank expects corporate investment to improve - outside the energy sector - following last week's signing of the updated North American trade agreement, new federal tax incentives and ongoing pressure from rising demand.

It will also be watching for positive developments such as more signs the economy can still expand without fuelling inflation. Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth.

Meanwhile, the data, on the inflation front, appears to be meeting expectations, as core measures continue to track two percent, and headline inflation is likely to ease due to lower gasoline prices.

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Bank of Canada keeps interest rate at 1.75%