Despite a surprisingly hawkish rate announcement in October, the Bank of Canada (BoC) said Wednesday that its overnight interest rate will stay at 1.75% for the rest of 2018.
The bank had a reserved tone in the announcement, pointing to concerns ranging from the current trade war between the U.S. and China and the collapse in oil prices in Alberta.
Here’s a look at some of the key takeaways.
The collapse in Canadian oil prices
Many had been paying close attention to how the BoC would address this issue, considering up until the announcement, it had said little.
“In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected,” the bank said in its release, clearly sending the signal it was concerned about the situation.
Alberta Premier Rachel Notley ordered oil producers Sunday to cut their output by 8.7% starting in January. The cut, which amounts to 350,000 barrels of oil per day, is meant to help push up the price of Alberta oil, which at one point sold for $10 per barrel compared to the $70 fetched by international producers.
The year-long mandatory cut is set to reduce Canada’s gross domestic product (GDP) growth in 2019. Canadian Imperial Bank of Commerce (CIBC) economist Royce Mendes estimates that the growth rate could fall by 0.1%, while Bank of Montreal (BMO) economists Benjamin Reitzes and Robert Kavcic said on Monday that GDP could expand by only 1.8% next year. BMO had previously forecasted a growth rate of 2%.
A slowing global economy
Economic data since October is also making it hard to justify a fourth BoC hike in 2018. On Monday, CIBC’s Avery Shenfeld said that domestic GDP has grown by 0% over the past two months, and that wage inflation appears to be “in retreat.” The BoC agreed, observing that momentum for economic growth has slowed in the fourth quarter of 2018, after a strong third quarter.
“Business investment fell in the third quarter, in large part due to heightened trade uncertainty during the summer,” the bank said. “Business investment outside the energy sector is expected to strengthen.”
Outside of Canada, the global economy has also slowed, partly due to uncertainty around ongoing trade conflicts — something the Bank of Canada flagged high up in its press release.
The overall tone is dovish
The concerns over the oil price crash, trade wars and slowing economic growth sent a clear signal to the market that a pause in rising rates is needed.
It’s not all bad, though. In Canada, the country’s housing markets are continuing to stabilize after a handful of slow-moving quarters; the same goes for household credit. And while inflation was growing at a quicker pace than desired in October, it is expected to slow down in the coming months as gasoline prices get lower.
After the BoC raised its overnight interest rate by 25 basis points to 1.75% in October, most experts anticipated another hike in December based on the hawkishness of the bank’s rate announcement. The bank typically uses hawkish — or more aggressive — language to suggest that more proactive measures are needed to guard against excessive inflation growth.
The BoC generally wants to keep inflation growing at a rate of 2%.
The next scheduled rate announcement will be in the new year, on Jan. 9.