Bank of Canada holds interest rates steady in the face of weaker economic growth

March 7, 2019 MD Financial



The Bank of Canada (BoC) announced it is maintaining the country's target overnight rate at 1.75% on Wednesday morning.

In its decision, the Bank admits that the economy will be weaker in the first half of 2019 than it initially projected back in January.

“The outlook continues to warrant a policy interest rate that is below its neutral range," the BoC said in its statement. “Given the mixed picture that the data presents, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook."

Canadian bond yields fell across the curve following the announcement, suggesting that many in the market felt the Bank's tone was more dovish than expected.

Although Bank Governor, Stephen Poloz continues to reiterate his belief that rates should move back into a more “neutral range" of 2.50% to 3.50%, many fear this range is too high for the Canadian economy, given consumers' high debt loads.

Going forward, the BoC's governing council will be closely watching developments in household spending, oil markets and global trade policy to determine the timing of future rate increases.

In Canada, the bank had been calling for a “temporary" slowdown in late 2018 and early 2019, mainly thanks to last year's drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces.

What it got instead was a sharper and more broadly-based slowdown in the fourth quarter of 2018, as consumer spending and housing market numbers came in lower than expected, despite strong growth in employment and labour income. The Bank says business investment and exports also fell short of expectations. Overall core inflation measures remain close to 2%.

Globally, although progress in U.S.-China trade talks and policy stimulus in China have improved market sentiment and commodity prices, recent data suggests that the global economic slowdown is also more pronounced and widespread than the Bank forecast in its January Monetary Policy Report. “Trade tensions and uncertainty are weighing heavily on confidence and economic activity," they write. “It is clear that global economic prospects would be buoyed by the resolution of trade conflicts."

Directly following the announcement, the S&P/TSX Capped Composite Index was relatively unchanged, rising a modest 0.25%. The Canadian dollar approached a three-week low leading up to the announcement before dropping further to US$0.7435.

For more information about the BoC announcement and what it can mean for you and your portfolio, please contact your MD Advisor.

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