Bank of Canada Holds Key Interest Rate Steady at 1%

Jane Switzer
by Jane Switzer December 6, 2017 / No Comments

In its last rate announcement of the year, the Bank of Canada said Wednesday it’s holding its overnight lending rate at 1% amid below-target inflation and the “evolution of the risks and uncertainties” around international trade policies.

The move was widely expected among economists and major banks. In a release, the bank reiterated concerns outlined in its last rate announcement in October: Although Canada’s economy is running near capacity, the spectre of scrapping the North American Free Trade Agreement (NAFTA) is casting a shadow on its outlook. Canada’s chief negotiator recently called demands from the United States “completely unworkable.”

Canada’s central bank hiked its benchmark interest twice in 2017 — first in July, and again in September — as Canada’s economy recovered from oil price shock and expanded at a burning 4.5% annualized pace in the second quarter. It’s been a banner year for growth: Unemployment fell to 5.9% in November, the lowest rate in nearly a decade, as the market gained 29,600 full-time jobs and 49,900 part-time positions. Even with an anticipated slowdown during the second half of the year, Canada is expected to lead the G7 countries in growth with a forecast of 3%.

“Recent Canadian data are in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017,” the bank said in a release. “Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter.”

Gasoline prices and other short-term factors pushed inflation slightly higher than anticipated, with measures of core inflation edging up to reflect “continued absorption of economic slack.” Third-quarter exports declined by more than expected, though the bank maintains its projection growth will resume as foreign demand strengthens. The bank kept its usual cautious tone, pointing to “ongoing­ — albeit diminishing — slack in the labour market.”

The bank acknowledged that “higher interest rates will likely be required over time,” but has consistently said decisions are guided by incoming data — especially amid handwringing over the possibility of inflicting economic shock and triggering a downturn.

In a statement following the October rate announcement, governor Stephen Poloz said he’ll be “cautious” about future rate hikes, outlining four key issues adding “uncertainty” to future projections: soft inflation, the degree of excess capacity in the economy, softness in wage growth, and elevated levels of household debt.

South of the border, U.S. Federal reserve chair Janet Yellen ends her four-year run in February, the first time since 1979 that an incumbent hasn’t been appointed to a second term. President Donald Trump has tapped Republican businessman Jerome Powell, a member of the Fed’s board since 2012, as the next chair. The Fed’s next interest rate announcement is Dec. 13.

The Bank of Canada’s next interest rate announcement is scheduled for Jan. 17, 2018, and will include the latest global and domestic economic outlook in its Monetary Policy Report.

Source: Bank of Canada