Bank of Canada keeps interest rates unchanged

BoC expects growth to slow into the first quarter of 2019

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The Bank of Canada held its monetary policy meeting last week on Wednesday. The Central Bank kept interest rates unchanged at 1.75% at its meeting. The Central Bank said that the path of monetary policy would depend on assessing the incoming economic data.

The BoC Governor Poloz said that the Central Bank policymakers voted to leave the benchmark interest rates unchanged at 1.75%. The Central Bank’s decision follows the December meeting where it took a more cautious tone on Canada’s economic outlook.

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The decision to leave interest rates unchanged comes on account of lower oil prices. Also, data on Canada’s GDP showed that the economy expanded smaller than previously expected.

“Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range. The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.” the Bank of Canada’s policy statement showed.

The neutral rate is within the 2.5% – 3.5% range.

The Bank of Canada also released its economic outlook report which took a more cautious approach. The data comes as policymakers expressed concerns on the weaker housing spending and real estate activity.

As a result, the Central Bank dropped its outlook for the GDP for 2019 to 1.7%. This was a much lower revision to the GDP. October’s economic report forecasts that the Canadian economy would advance 2.1%.

Interest rates on hold

Heading into the interest rate decision, economists took sides. Many expected the BoC to hike rates at this week’s meeting.

In its economic outlook report, the Bank of Canada said that the global outlook continues to face important uncertainties but acknowledged the positive steps taken by the United States and China.

However, there was skepticism as the Central Bank said that there was no sign of any deal in place yet.

About the Canadian economy, the Central Bank said that it was operating near full capacity for over a year. The Central Bank acknowledged that the unemployment rate is now at a 40-year low and inflation was close to its target.

It highlighted that the main risks came from the developments in the oil markets. The fourth quarter GDP should slow down mainly on account of the oil markets.

While calling the slump in oil markets as temporary, the Bank of Canada said that it expects Canada’s economy to return to above average growth potential after that.

The forecast for 2020 is at 2.1%, which was an upward revision from the previous estimate of 1.9%.

Canada’s inflation should average around 2.0%, down from 2.3% estimates given previously. Consumer prices are expected to slow in the first and second quarters of this year, briefly falling below the inflation target rate before picking up higher.

The Bank of Canada’s meeting comes following the previous week’s jobs report. Data showed that the Canadian unemployment rate was steady at 5.6% while the economy added 9.3k jobs which were also better than forecasts.

However, underlying data showed that most of the job gains came from part-time jobs.

With the BoC holding pat on interest rates, economists expect to see no changes to interest rates for the remainder of the first quarter of 2019.

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