Canadian Manufacturing

Bank of Canada holds interest rate at 1.75%; keeps eye on oil slump, investment

Thanks to the strengthened economy, the bank has been on a gradual rate-hiking path for more than a year


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OTTAWA—The Bank of Canada is leaving its interest rate unchanged and says the timing of future hikes will depend on factors such as how long the oil-price slump lasts, how well business investment picks up its pace and how much room the economy still has left to grow.

The central bank’s move Wednesday maintains its trend-setting rate at 1.75 per cent. The decision follows the quarter-point increase at the bank’s previous policy meeting in October.

Thanks to the strengthened economy, the bank has been on a gradual rate-hiking path for more than a year and has already raised the benchmark five times since the summer of 2017.

The central bank raises the interest rate to prevent inflation from climbing too high. Heading into Wednesday’s announcement, many market watchers had expected governor Stephen Poloz to wait until at least January before his next rate increase.

More hikes are on the way, but the bank said the timing of its next one will hinge on changes in global trade policies as well as how higher interest rates from past increases affect consumption and housing.

The bank also underlined several recent economic developments that it will now take into account.

“The persistence of the oil-price shock, the evolution of business investment and the bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy,” the bank said Wednesday in a statement.

On oil, the central bank blamed the steep slide in prices on the combination of geopolitical developments, uncertainty about the outlook for global growth and the expansion of American shale oil production. The price of western Canadian oil, the bank added, has fallen further than other benchmarks because of transportation constraints that have led to production cuts.

“Activity in Canada’s energy sector will likely be materially weaker than expected,” the statement said.

Recent data, the bank noted, also show the economy has less momentum heading into the final quarter of 2018. It says it’s related to factors such as a drop in business investment that it largely connects to significant uncertainty around trade last summer.

The bank expects corporate investment to improve—outside the energy sector—following last week’s signing of the updated North American trade agreement, new federal tax incentives and ongoing pressure from rising demand.

It will also be watching for positive developments such as more signs the economy can still expand without stoking inflation. The bank pointed to recent downward revisions to gross domestic product data that suggested there’s still some space for non-inflationary growth.

The bank, which tries to keep inflation within its target band of one to three per cent, noted that October’s inflation reading of 2.4 per cent was above its ideal two per cent bull’s-eye. However, due to weaker gasoline prices, it is now predicting inflation to move down in the coming months by more than its previous forecast.

The Bank of Canada has estimated it will no longer need to increase the interest rate once it reaches a level of between 2.5 and 3.5 per cent, but Poloz has said this destination range remains “sufficiently uncertain” and could move up or down.

News from © Canadian Press Enterprises Inc. 2016

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