Bank of Canada signals extended rate pause, $C drops

The S&P  TSX composite index closed up 5.53 points to 16,092.07 after hitting an intraday peak of 16,145.80 a high for the year

The S&P TSX composite index closed up 5.53 points to 16,092.07 after hitting an intraday peak of 16,145.80 a high for the year

"Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range", it said in a statement, adding that there was "increased uncertainty about the timing of future rate increases."

The one qualifier to that is that just two sentences later, the bank pulled its punch - by talking about "the timing of future rate increases". But even there, the central bank has stressed the "increased uncertainty" surrounding such future move.

"Following the lead of most of the world's central bankers, the Bank of Canada continued to take a more dovish tone". The Bank of Canada did a half pivot in January, when it said it planned to take the benchmark rate to a neutral setting "over time".

The bank now believes the weakness will last through the first half of 2019, which is longer than the temporary slump governor Stephen Poloz had predicted earlier in the winter. Fourth-quarter growth, reported last week, was well below the bank's estimates, barely registering in positive territory.

The rate decision report highlighted the recent slowdown experienced in the Canadian economy saying, "the fourth quarter slowdown was sharper, more broadly based than forecast". Consumer spending and the housing market were soft, despite strong growth in employment and labour income. This no longer looks like a problem that a domestic oil rebound will cure.

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. Moving from there to "watch out for falling rates" in 13 days would have put considerable strain on unprepared financial markets, not to mention Mr. Poloz's credibility. Those two words reflected deteriorating economic conditions and showed that policy makers were in no rush to raise interest rates.

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"The Bank of Canada has sent a clear message that it views the 2019 outlook to be less rosy than it did even a month ago", said Frances Donald, head of macroeconomic strategy with Manulife Asset Management.

One will come at the Bank of Canada's next rate decision and quarterly Monetary Policy Report in late April, when it updates its estimated range for the neutral rate of interest - the level at which interest rates neither stimulate nor dampen economic growth.

Statistics Canada said the late-2018 slowdown was mostly due to a 2.7 per cent contraction, on a quarter-over-quarter basis, in investment spending.

Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices.

"My guess is that the fourth-quarter GDP rocked the Bank of Canada's boat". Overall exports saw a slight decline and household spending slowed for a second straight quarter. "Indeed, any further deterioration in the backdrop will prompt discussion of rate cuts to heat up further".

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