Bank of Canada holds key interest rate on hold

Galtero Lara
Enero 13, 2019

Its last rate rise was in October, when it raised rates for the fifth time since July 2017.

"The general thesis here is that the bank has a bit more work to do on the rate front", said Shaun Osborne, chief currency strategist at Scotiabank, who also expects the price of oil to rebound and the US dollar to weaken. Mortgage and debt holders there will be swimming against a stronger rate current this time.

"The phrase "over time" is meant to convey that there's no regularity, there's no preset course - it's all about data and it's purposefully vague".

The Canadian dollar is expected to rally in 2019, recovering some of last year's decline, as the Bank of Canada surprises speculators who are betting that it has already finished raising interest rates, a Reuters poll showed.

It said it will no longer need to raise the rate once it reaches a "neutral" level of between 2.5 percent and 3.5 percent. "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 drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income.

It's now projecting growth to be just 1.7 per cent in 2019, down from its October forecast of 2.1 per cent - but it remains optimistic the economy will begin to strengthen again as early as the second quarter of this year. The 2018 growth expectations were kept the same at 2.1 percent; however, the projections for 2019 were downwardly revised to 1.7 percent.

The Bank of Canada expects mandatory production cuts will take a toll on Canada's oil sector.

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Poloz was asked how Canada can shield itself from trade unknowns related to the U.S.

"Unfortunately, there doesn't seem to be a place to hide from uncertainty like that", he said, before discussing the U.S.

Looking ahead, the bank said exports and non-energy investment were expected to grow solidly, moved forward by foreign demand, a new North American free trade pact, a weaker Canadian dollar and federal tax measures aimed at investment.

The bank listed these factors as population growth fuelled by immigration, low unemployment rates, cheaper gasoline prices and wage gains.

"There is no question in our minds that the economy is (on) a solid footing", Poloz said of the governing council.

"While these producers have agreed to cut output by 1.2mb/d for six months starting January 2019, few details have been forthcoming about the distribution of the cuts, and they may prove insufficient to reduce the oversupply of oil", the World Bank said.

Canada's sharp deceleration in wage growth since last spring has also been highlighted by experts as a concern for the economy - particularly since the tightened labour market should translate into higher wages. But main focus of investors remain on Bank of Canada's Monetary Policy Update scheduled to release tomorrow and U.S. crude oil inventory data which is expected to boost CAD bulls as forecasts hint at draw in stock pile information.

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