Interest Rates

Bank of Canada holds interest rates, suggests it’s in no hurry to raise them

By: Jessica Mach on July 10, 2019

The Bank of Canada (BoC) held its overnight interest rate at 1.75% for the sixth consecutive meeting on Wednesday, maintaining the cautiously optimistic tone it had set back in May.

The central bank credited a surge in oil production, revitalized household spending, a “healthy” labour market, a stabilizing housing market and stronger foreign demand for Canadian exports as reasons for national economic growth being “stronger than predicted” in the second quarter.

Inflation is also on target, at 2%. While the bank expects inflation to dip later this year, it also predicts that the rate will climb back up to 2% by mid-2020 as gasoline prices and “other temporary factors” ease off.

However, the BoC also suggested that ongoing global trade conflicts “are having a material effect on the global economic outlook.” The ongoing trade wars between the U.S. and China in particular are dampening manufacturing activity and business investment, as well as pushing down commodity prices.

The central bank’s guarded optimism is a recent development. As recently as April, the BoC had stopped hinting at the possibility of a rate hike, warning instead that the economy had weakened and rate hikes were potentially no longer needed. This led experts to believe that a rate cut was coming as soon as the second quarter of 2020. When the economy is strong, the BoC typically raises its overnight interest rate to deter reckless spending. When the economy is slow, the bank lowers its overnight rate to encourage consumers to spend more.

Since the bank’s last rate announcement, the national economy has continued to see improvements. But with trade conflicts still going strong, these improvements are neither enough to justify a rate hike, nor reason for the bank to shift away from its largely dovish stance.

“Recent data show the Canadian economy is returning to potential growth,” read the BoC’s announcement on Wednesday. “However, the outlook is clouded by persistent trade tensions.”
 

Good developments in the economy

Since the BoC’s last rate hike in October, the national economy has been hit with several setbacks: sluggish oil prices, concern over global trade conflicts, mounting household debt and with it, slower rates of consumer spending.

But in recent months, the outlook has gradually improved. Oil prices were seeing a resurgence by the last BoC rate announcement in May, and some trade conflicts — especially those that involve the U.S. — have started to ease off. On Monday, the Financial Post corroborated the BoC’s sentiment that the national economy performed better in the second quarter than anyone had anticipated, while also noting that U.S. growth is continuing to slow.

The latest Statistics Canada's Labour Force Survey, released Friday, found that the national unemployment rate had dropped, and the economy had lost 2,000 jobs. But that’s a small loss compared to the gains the job market has seen in 2019, argued the CBC’s Don Pittis, who pointed out that the economy created more than 400,000 this year, and that part-time jobs that were lost in June had been replaced by permanent work.

Another indicator that the economy is improving are attitudes towards business. Francis Fong, chief economist at the Chartered Professional Accountants of Canada, told the CBC on Monday that a survey of high-ranking corporate accountants across the country shows optimism.

“It's actually the first increase in optimism we have seen in our survey since 2017,” Fong said.
 

Is a rate hike coming?

While these improvements are encouraging, the BoC said that it continues to see a rate hold as “appropriate.”

“As Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation,” the announcement read.

 

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