BoC Keeps Interest Rate Steady but Rate Cut Still an Option

The Bank of Canada, in its first monetary policy meeting this year maintained the key overnight lending rate steady at 0.50%. The BoC’s monetary policy decision to keep interest rates steady was widely expected.

The central bank had last cut interest rates by 25 basis points in July 2015. The central bank’s monetary policy statement, however, started on a cautious note pointing to the risks on account of uncertainty from the United States, Canada’s closest trading partner. Wednesday’s monetary policy meeting also saw updated forecasts and a broad economic assessment from the central bank since the November elections in the U.S., but officials struck a very cautious tone.

“The outlook, however, is subject to considerable uncertainty, given the unknowns around policy actions by the incoming U.S. administration, particularly concerning trade,” the BoC statement said.

The central bank expects to see inflation move closer to the 2% target rate in the coming months while sounding upbeat that the fiscal and consumption measures will support growth this year. The central bank said that higher energy prices and impact of lower food would dissipate as it expects inflation to move closer in the coming months but did not specify a timeline. The central bank expects Canadian real GDP to grow 2.1% in 2017 and 2018 implying a return to full capacity by mid-2018.

The next inflation reading is due on Friday, January 20^th. Previously, inflation report for November showed a decline of 0.4% on a month over month basis dragging the annual inflation rate to 1.2%. For December, economists polled expect to see a flat print for December, while the year over year inflation rate is expected to rise to 1.7% led by mostly an increase in energy prices.

BoC officials cautious on Trump’s policies

As with most of the economies in the world, officials at the Bank of Canada were also cautious of the Trump administration with the quarterly document learning about the potential fallout for Canada from the new Trump administration and his policies. While the central bank offered an optimistic outlook by sticking to its growth expectations from the last quarter, the officials cautioned that the economic outlook had only factored in the effects of a fiscal boost from the U.S.

If the U.S. President-elect Trump, follows through with his promised fiscal policies, officials at Bank of Canada are optimistic that it would help the Canadian economy through increased foreign demand but also warned that Trump’s promises to cut corporate taxes could threaten Canadian competitiveness.

Although the Canadian dollar was trading stronger against the Greenback, the Loonie fell during the press conference where the head of the central bank said that an interest rate cut “remains on the table.”

[Tweet “USDCAD remained volatile as the USD initially fell after Trump said that the Dollar was too strong”]

Flagging the risks of a rate cut, the BoC President Stephen Poloz said at the press conference that, the central bank had identified some downside and upside risks in the projections. He stated in the event any of the downside risks materialize which puts the inflation target at risk; the central bank chief said that there was room to maneuver. “In that context, especially with inflation being below target for a prolonged period, yes a rate cut remains on the table, and it would remain on the table as long as those downside risks are still present,” Poloz said.

The USDCAD currency pair remained volatile as the U.S. dollar initially fell after Trump said that the U.S. dollar was too strong but late Wednesday evening, hawkish comments from Fed Chair, Janet Yellen on increasing prospects for interest rate hikes managed to push the Greenback higher, recovering most of the losses from the previous day.