BoC holds the line on rates

Governor of the Bank of Canada Stephen Poloz speaks during an interest rate announcement at the Bank of Canada in Ottawa on Wednesday

Governor of the Bank of Canada Stephen Poloz speaks during an interest rate announcement at the Bank of Canada in Ottawa on Wednesday

These developments are occurring in the context of a Canadian economy that has been performing well overall. But main focus of investors remain on Bank of Canada's Monetary Policy Update scheduled to release tomorrow and USA crude oil inventory data which is expected to boost CAD bulls as forecasts hint at draw in stock pile information.

The Bank of Canada revised consumption down, and now projects it to add just 1 percentage point to growth this year, which would be its weakest contribution since the 2009 recession.

The Bank of Canada is expected to hold its benchmark interest rate at 1.75 per cent today as it makes its first policy decision of 2019.

Before long, however, the central bank expects the economy to expand with renewed vigour and it stresses more rate hikes will be necessary over time.

At least some of this, of course, was inevitable.

The Bank of Canada today maintained its target for the overnight rate at 1.75 per cent.

"Our base case is that the economy will grow above potential this year and next".

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The recent plunge in crude prices has darkened the central bank's short-term economic outlook - but Poloz predicted the country-wide effects of the oil slump to dissipate in the coming months and to allow Canada's healthy economic expansion to resume with fresh momentum. In the first half of 2018, household spending contributed roughly half of GDP growth.

Residential investment has subtracted from growth for three consecutive quarters.

"While these producers have agreed to cut output by 1.2mb/d for six months starting January 2019, few details have been forthcoming about the distribution of the cuts, and they may prove insufficient to reduce the oversupply of oil", the World Bank said. The ideal storm of falling oil prices, a dovish Bank of Canada, a stock market meltdown and a somewhat hawkish U.S. Federal Reserve that knocked the loonie for a loop in December, is just a bad memory today.

Even as the central bank turned more dovish in December, it reiterated that it will need to raise rates to a neutral range between 2.50 and 3.50 percent to achieve its inflation target. Mortgage and debt holders there will be swimming against a stronger rate current this time. That trend looks likely to deepen as the impact of the oil decline ripples through the economy.

"We expect the BoC to hold at this meeting, but to provide some indication that it remains on track for further hikes later this year dependent on what we expect to be still-solid data", Brett House, deputy chief economist at Scotiabank, told Yahoo Finance Canada.

On Wednesday, Bank of Canada Governor Stephen Poloz acknowledged that housing "is taking longer to stabilize than we expected", and added that given the excesses that had built up in the overheated Toronto and Vancouver markets, "it is always hard to judge where the market will stabilize once the froth has been removed".

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