Central bank holds rate amid oil slump; casts doubt on future hikes

Bank of Canada Governor Stephen Poloz. Image file

Bank of Canada Governor Stephen Poloz. Image file

Lower growth prospects are expected to reinforce Bank of Canada Governor Stephen Poloz's strategy of moving very gradually on increases to its overnight rate.

The central bank, which has lifted rates fives times since July 2017 as the economy strengthens and reaches capacity, repeated that more monetary tightening would be needed to help meet its 2.0 percent inflation target.

None of the economists polled by Bloomberg were expecting an increase this time around, but trading in investments known as overnight index swaps implies there's a two in three chance of a rate hike next month. Business investment fell in the third quarter, in large part due to heightened trade uncertainty during the summer.

Canada's central bank chief indicated during a news conference in Toronto on Thursday that he may not be able to do much to lift markets, which have slumped this week amid concerns that trade tensions between China and the USA are far from resolved. The statement again discussed rates getting to "neutral", but with the significant change that the policy rate requires to rise to a neutral range - rather than to a neutral stance as discussed in October.

"It is already clear that a painful adjustment is developing for Western Canada, and there will be a meaningful impact on the Canadian macroeconomy", Poloz said in an address to be delivered at a breakfast event hosted by CFA Toronto.

China's Surplus With US Hits New Record In November
Import growth was 3 per cent, the slowest since October 2016, and a fraction of the 14.5 per cent seen in the poll. In particular, imports of soybeans plunged by 38 per cent, while iron ore, coal and steel imports also fell.

"In light of these developments and associated cutbacks in production, activity in Canada's energy sector will likely be materially weaker than expected", it said of an industry that generates more than 10 percent of the nation's exports receipts. In the years that have followed the last slump, the sector has adjusted its cost structures, wages and employment levels, Poloz said. Another is that the economy continues to do relatively well, growing at a healthy 2.2 percent clip so far this year, following a 3 percent pace in 2017.

Market watchers, many of whom had expected the bank to increase the rate in January, now believe the recent economic developments will delay the timing of future rate hikes.

He added he remains hopeful business investment will rebound now that much of the uncertainty surrounding North American free trade has eased with the new agreement between the United States, Mexico and Canada.

But it noted downward revisions by Statistics Canada to growth figures, together with recent macroeconomic developments, "indicate there may be additional room for non-inflationary growth".

Moving forward, the bank will scrutinize the results of its quarterly survey of business executives, to be published December 21, for clues on corporate sentiment. "We have to do our work in order to understand the shock better and what its magnitude actually is".

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