OTTAWA: Canada’s central bank on Wednesday maintained its key lending rate at 1.75 percent, citing a continued slowing of the global economy and fears over a US-China trade war.
The Bank of Canada said the economy “has been performing well overall,” but forecast it will grow by only 1.7 percent this year, or 0.4 percentage points slower than in its October outlook.
The rate hold was expected by economists after several increases over the past year from near record lows.
In its first economic assessment of the year, the central bank said rates “will need to rise over time into a neutral range,” or between 2.5 and 3.5 percent, in order to achieve its inflation target.
But the pace of the increases, it added, would depend on developments in Canada’s oil sector, housing market and global trade.
“As we expected, the rate message wasn’t that they were done (increasing rates) for good, but rather, that the timing will be a bit more extended,” CIBC analyst Avery Shenfeld commented in a research note.
He called the bank’s statement “more hawkish than what markets were pricing in,” “bearish for fixed income markets and slightly bullish” for the Canadian dollar.
The central bank noted that inflation in November eased to 1.7 percent due to lower gasoline prices and would likely remain below the bank’s 2.0 percent target throughout the year before rising near year’s end.
Growth in the global economy continues to moderate. US growth in particular remains solid “but is expected to slow to a more sustainable pace through 2019,” the bank said.
“However, there are increasing signs that the US-China trade conflict is weighing on global demand and commodity prices,” it said.
Oil prices remain about 25 percent lower than in the bank’s October Monetary Policy Report due primarily to increased US oil supply and recent “worries about global demand.”
This has had a “material impact on the Canadian outlook,” as Canada is the world’s fourth largest oil producer and exporter.
In addition to low prices, Canadian firms are facing bottlenecks in getting oil to markets due to a lack of new pipeline construction amid legal feuds and protests by environmental activists.
As a result, investment in the Canadian oil sector is projected to weaken further.
Consumption and housing investment have also been weaker than expected as lending rates increased.
Otherwise, the Canadian economy has been humming along. Growth is close to potential, employment growth has been strong and unemployment is at a 40-year low.
Looking ahead, exports and non-energy investments are projected to “grow solidly,” supported by a new continental trade deal with the United States and Mexico (that must still be ratified), a lower Canadian dollar and federal tax measures aimed at boosting investment.
The Bank of Canada said it expects the economy to slow temporarily in the first quarter but momentum should pick up thereafter, leading to “above-potential growth” of 2.1 percent in 2020. —AFP