The Bank of Canada is leaving its overnight rate unchanged as positive signs in the Canadian economy are mostly offset by global trade tensions, including China’s restrictions on Canadian canola and meat.
A healthy labour market and solid business and consumer confidence led the central bank to give a slight bump to its 2019 growth forecast, which now stands at 1.3 per cent, up from the 1.2 per cent in its April projection.
The overnight rate remains at 1.75 per cent, where it has stayed since the Bank announced an interest rate increase in October 2018.
Bank of Canada Governor Stephen Poloz released the bank’s latest interest rate decision Wednesday morning, as well as a monetary policy report outlining the bank’s detailed view of the economy in Canada and the world.
In advance of Wednesday’s report, private sector economists widely expected the bank would stay on the sidelines this week. The bank’s Wednesday forecast of 1.3 per cent growth for 2019 is just below the average private sector forecast of 1.4 per cent.
Economists said earlier this week that Mr. Poloz’s challenge would be to acknowledge the recent strength in the Canadian economy without fueling a spike in the Canadian dollar at a time when the global economy is showing signs of weakness.
RBC senior economist Josh Nye said Wednesday’s policy statement was more dovish than expected.
While the bank did not appear to be moving toward a clear bias toward easing interest rates, he said in a note that markets seem justified in thinking the bank’s next move is more likely to be down than up.
“Concerns about trade tensions and slowing global growth received top billing in the statement, unlike in May when signs of a firming domestic economy were highlighted,” he said.
Wednesday’s report said the Canadian economy performed above expectations in the second quarter, following a slowdown in late 2018 and early 2019. The second quarter improvement is attributed to temporary factors, such as the reversal of weather-related slowdowns earlier in the year and a surge in oil production.
The bank expects growth in the Canadian economy over its projection period will be broad-based, including strengthening wage gains and exports that are on track for moderate growth.
Yet the report also notes that moves by China to restrict canola and meat imports from Canada hurt exports and the ongoing tension between China and the United States is an overarching concern.
“Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices,” the bank said Wednesday.
The bank lowered its forecast for 2019 global growth Wednesday to 3 per cent, down from its April forecast of 3.2 per cent.
The U.S. Federal Reserve could potentially cut rates later this year, which would create some pressure on Canada to follow suit.
The bank’s news release did not lay out a future direction for Canadian rates.
“Recent data show the Canadian economy is returning to potential growth. However the growth is clouded by persistent trade tensions,” the bank said. “Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate. As [the bank’s] 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 Bank of Canada’s latest read on the strength of this year’s economy is still short of the pace it had expected in January, when its first policy report of the year projected 1.7 per cent growth for 2019.
Ahead of Wednesday’s decision, the consensus of private sector economists surveyed by Bloomberg was for 1.4 per cent year over year growth in 2019, followed by 1.8 per cent in 2018 and 1.7 per cent in 2021.
Wednesday’s bank report projects growth will hit 1.9 per cent in 2020 – down from its April forecast of 2.1 per cent – and two per cent in 2021, which is unchanged from the April forecast.
The Canadian economy grew by 1.9 per cent in 2018 and 3 per cent in 2017.
Inflation is forecast to remain close to 2 per cent throughout the forecast period, which is at the middle point of the bank’s target range of 1 to 3 per cent. Wednesday’s report projects inflation of 1.8 per cent in 2019, down from the April forecast of 1.9 per cent. Inflation is expected to come in at 1.9 per cent next year and 2 per cent in 2021, according to the bank.