Bank of Canada Holds Key Interest Rate at 0.5%

In its regularly scheduled interest rate announcement, the Bank of Canada said Wednesday morning it’s keeping its overnight lending rate at 0.5%. Although cautiously optimistic about Canada’s growth into 2018-19, there’s “still considerable uncertainty about the outlook,” the central bank said in a release.

“It is too early to conclude that the economy is on a sustainable growth path.”

The decision to hold steady was widely expected — the bank hasn’t moved its trendsetting rate since July 2015, and isn’t expected to until sometime in 2018 — but diverges with a recent spate of positive economic data. The bank acknowledged this, upgrading its forecast for gross domestic product growth this year to 2.6%, up from its estimate of 2.1% in January. However, it remains tepid: despite “robust” employment data, gains in the number of hours worked were soft, and wage growth “subdued.”

Inflation hit the bank’s 2% target, mainly due to higher oil prices and carbon pricing measures in Ontario and Alberta.

In its latest Monetary Policy Report (MPR), the bank said “a notable increase in global protectionism” is the focal point of uncertainty for Canada’s economy, particularly when it comes to U.S. trade policies. The majority of Canada’s exports go to the U.S., where the spectre of renegotiating the North American Free Trade Agreement hangs in the air and a proposed border tax (called “destructive” and “detrimental”) sits on the table.

Although it acknowledges the economy has grown faster than expected in its last MPR, released in January, the bank echoed several of its sentiments from earlier this year about what’s holding Canada back: exports face “ongoing competitiveness challenges,” business investment is weak, and there’s still persistent slack in Canada’s economy compared to our U.S. neighbours.

On March 15, the U.S. Federal Reserve hiked its key interest rate a quarter of a percentage point to 0.75% amid a strengthening labour market and expanding economic activity. In a release, the Fed said it’s confident in job gains, household spending, and business investment.

The Bank of Canada’s next interest rate announcement is scheduled for May 24.

Source: Bank of Canada