Bank of Canada holds key rate at 0.5%, says uncertainty still clouds growth

Bank of Canada building
Bank of Canada building

Uncertainties continue to obscure the economy’s stronger-than-expected start to the year, the Bank of Canada said Wednesday as it stuck with its trendsetting interest rate of 0.5 per cent.

In explaining its decision to hold the rate, the central bank once again highlighted weak wage growth and the slowing pace of underlying inflation as examples the economy still has room for improvement.

For balance, the bank’s scheduled rate announcement pointed to the surprisingly healthy start to the year in areas such as employment, consumer spending and the housing markets. In Wednesday’s statement, the bank added better business investment numbers to the list.

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“Recent economic data have been encouraging,” the bank said.

“Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions.”

The bank’s statement also said while recent government policy measures on real estate have contributed to more sustainable outlooks for household debt, the rules have yet to have a substantial cooling effect on hot housing markets.

Many economists later noted that the tone of the bank’s brief, one-page statement was a little more upbeat than they had expected.

“There is one clear message embedded in these 300 words and that is the Bank of Canada is not spooked either by housing or by coming trade talks (with the U.S.),” said Frances Donald, senior economist for Manulife Asset Management.

“They are staying the course, confident in the growth path and not afraid of a recent deceleration in inflation.”

Donald said the statement read a bit like a “placeholder” ahead of the Bank of Canada’s July rate decision, which will be accompanied by its updated projections. She added that it was likely too difficult for the bank to summarize its nuanced views in Wednesday’s release about the complex and developing issues Canada has faced over the past couple of months.

Analysts had widely predicted governor Stephen Poloz to keep the rate locked at its very low level for a 15th straight decision, as significant unknowns underlined by the bank in the past continue to swirl around the U.S. agenda on trade and taxation.

“The uncertainties outlined in the April (monetary policy report) continue to cloud the global and Canadian outlooks,” said the bank, without making any specific mentions this time about the potential policy path of Canada’s largest trading partner.

Still, Jimmy Jean, a senior economist for Desjardins, wrote in a research note to clients Wednesday that the bank seemed surprisingly less concerned by developments south of the border.

“Poloz sounded reassured by what he heard in his meeting with (U.S. Treasury Secretary Steven) Mnuchin at the G7 meeting,” Jean wrote.

“Perhaps he received some privileged information? In any event, the statement goes in the direction of prompting a rethink of the monetary policy trajectory in Canada.”

The bank also predicted that the “very strong growth” over the first three months of the year would moderate in the second quarter, even though at the same time it expects the U.S. economy to rebound.

On core inflation, the bank noted that recent readings for its three measures, which reduce the influence of some more volatile consumer items like gasoline, have stayed below its ideal target of two per cent. That signals the entire economy has yet to catch up to the recent momentum.

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