Bank of Canada Leaves Rates Unchanged, Pledges Cautious Policy Approach
The Canadian dollar fell nearly a full cent to around 78 cents US after the Bank of Canada announced October 25 it is holding its key overnight lending rate at 1%.
The economy has experienced robust growth in 2017, but the latest data show that she took a break in July. The Bank projects inflation will rise to 2 per cent in the second half of 2018.
Among the top risks identified by the Bank of Canada to its outlook is the renegotiation of the North American Free Trade Agreement.
"While less monetary policy stimulus will likely be required over time, the governing council will be cautious in making future adjustments to the policy rate", the central bank said.
The persistence of labor-market slack, it said, suggests there is more room for the economy to grow without triggering a material advance in inflation.
The wait-and-see message sliced more than a cent from the Canadian dollar, which tumbled to its weakest point since July, and bets on a December rate increase slipped to less than 30 percent from 37 percent before the rate announcement.
The bank cited both the uncertainty over NAFTA and "targeted discretionary" protectionist measures, such as the massive tariffs imposed recently on Bombardier Inc.'s new C Series commercial jets.
Bank of Canada Stephen Poloz explains why he didn't hike interest rates Wednesday in Ottawa.
While growth of just 1.5 per cent two years from now isn't an optimistic view, forecasting that far into the future always has to come with a grain of salt.
Economic growth in Canada was stronger and more broad-based than expected, the central bank said, but growth is expected to moderate in 2017's second half. Its GDP forecast for 2018 and 2019 remain largely unchanged, at 2.1 per cent (versus 2 per cent) and 1.5 per cent (versus 1.6 per cent) respectively. Because of high debt levels, household spending is likely more sensitive to interest rates than in the past. The central bank sets rate policy to hit and maintain 2% inflation. Add to that: average hours worked remains low, and long-term unemployment remains "elevated". The Bank is also mindful that global structural factors could be weighing on inflation in Canada and other advanced economies.
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