Economy

Bank of Canada keeps key interest rate unchanged

December 06, 2019 04:41·
JPMorgan says USD CAD will rise early next year

JPMorgan says USD CAD will rise early next year

While others around the world, including the US Federal Reserve, have cut rates in recent months in an attempt to stimulate their economies and head off a global downturn, the Bank of Canada's main lending rate has stood at 1.75 percent since October 2018.

Gross domestic product in the third quarter increased at an annual rate of 1.3 per cent, an uninspiring result, but exactly the outcome that the bank had predicted.

It was the ninth consecutive meeting at which the central bank opted to stay the course, a remarkable streak considering what's happening elsewhere. To cushion the blow to our economy, the Bank of Canada cut its policy rate twice. The waves of monetary stimulus have receded lately, but a palpable sense of worry remains. This target for the overnight rate is often referred to as the Bank's policy interest rate.

While some 40 other central banks have lowered rates, Canada has maintained this rate for over a year now. "Moreover, data have been revised upward, revealing that investment earlier this year was higher than previously reported", Lane said.

"Statement from the Bank of Canada was arguably more upbeat than the message put out last October".

The next interest rate announcement is January 22nd.

Back in October, the Bank of Canada, which has yet to start its easing phase, signaled that a rate cut by the end of the year could be possible amid the nonstop US-China trade war that keeps harming the export-oriented economy. The value of the Canadian dollar rose, a sign traders were discounting the possibility of lower interest rates. "In sum, there is no reason for the Bank of Canada to move in step with the Fed". That's bolstering the central bank's confidence in its forecast the economy is poised to rebound.

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The new policy statement notes that inflation is expected to hover around the central bank's two-per-cent target, "consistent with an economy operating near capacity".

"The bank must know something that everyone else in the markets doesn't in terms of risks to global trade policy that remain deeply unsettled, (the) risk to financial markets (and) USA dollar funding pressures", he said by phone.

In a speech to the Ottawa Board of Trade, deputy governor Timothy Lane said inflation in Canada remains on target and a strong job market points to sources of growth.

But for now, the Canadian central bank appears pleasantly surprised by the economy's resilience.

The statement noted that the economic growth of Canada decelerated in the third quarter, but the remainder of its characterization noted underlying strength, especially in housing investment and "unexpectedly" in business investment spending.

They clearly didn't anticipate adding business investment to that list. Consumer spending and housing activity are important sources of resilience in the Canadian economy, and the BoC indicated that it would continue to be on alert for any financial vulnerabilities that may affect the household sector.

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