Bank of Canada holds interest rate, underlines ‘growing’ trade uncertainty

Interest rate
Interest rate

The Bank of Canada kept its key interest rate target on hold Wednesday as it pointed to a climate of broadening, important unknowns around trade.

In explaining its decision to maintain its benchmark at 1.25 per cent, the central bank noted that recent trade policy developments have created thickening clouds around the outlook for the Canadian and global economies.

U.S. President Donald Trump recently added threats of steel and aluminum tariffs to an already uncertain context for Canada that includes concerns over NAFTA’s renegotiation and fears over competitiveness, following corporate tax-cut announcements south of the border.

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“Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks,” the bank said in its statement Wednesday.

The Bank of Canada also noted fourth-quarter growth was weaker than expected, largely due to higher imports, and that it’s still assessing impacts on housing markets from new policies, including recent changes to mortgage rules.

But it also said global growth continues to be solid and broad-based, the economy is running at near capacity, inflation is close to target and wage growth has improved, although still remains below where many expect it should be. For the U.S., the bank predicted fresh government spending and the tax reductions would likely lift growth in 2018 and 2019.

Ahead of the announcement, governor Stephen Poloz was widely expected to hold off moving the rate because of weaker economic numbers in recent weeks and the expanding trade uncertainty.

Poloz has introduced three rate hikes since last summer, including an increase in January. The moves came in response to an impressive economic run for Canada that began in late 2016.

Earlier this month, Poloz noted in a speech that central bankers have had to grapple with the ongoing “era of heightened uncertainty.”

“We have been working on the theme of uncertainty since the global financial crisis revealed the limits of our models and our knowledge,” Poloz said in a speech in London, where he accepted the central bank of the year award on behalf of the Bank of Canada.

“Because profound uncertainties are everywhere, we began talking about monetary policy as an exercise in risk management, as opposed to the precision engineering that many believe the practice of monetary policy to be.”

In its statement Wednesday, the bank reiterated it expects more hikes to be necessary over time, but that the governing council will remain cautious when considering future decisions.

The council will continue to be guided by incoming data, such as the economy’s sensitivity to higher rates, the evolution of economic capacity and changes to wage growth and inflation, it said.

In monitoring the country’s housing data, the bank said a surge of strong numbers in late 2017 was followed by softer figures early this year. This suggests “some pulling forward of demand ahead of new mortgage guidelines and other policy measures,” the bank said.

The central bank’s next rate announcement is scheduled for April 18, when it will also publish its updated economic projections.

The bank said the impacts on inflation and growth from commitments in last month’s federal budget would be incorporated into its April projections.

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