News Story

Bank of Canada Holds Rates Steady as Trade Conflicts Weigh on Global Demand

- The Bank of Canada held interest rates steady as expected on Wednesday over concerns that trade disputes may be dampening the global economy.

After a quarter-point hike back in October, the BoC left rates unchanged at 1.75%, in line with economic forecasts.

Although BoC considered the current moderation in the global economic expansion to be in line with its expectations, it warned that “signs are emerging that trade conflicts are weighing more heavily on global demand.”

BoC policymakers indicated that the interest rate must rise into a neutral range to achieve its inflation target, but noted that the appropriate pace of rate increases would depend on a number of factors.

“These include the effect of higher interest rates on consumption and housing, and global trade policy developments. 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 BoC said in its rate statement.

A recent Reuters’ survey showed that a majority of economists expect the BoC to increase rates three times during 2019, although conviction has dropped slightly to 56% from the 60% seen in the October survey.

“In any event, the Bank's next forecast is due in January, when our projection has them returning with a quarter-point hike. We'll need to see both firmer GDP results for October and at least some signs of a turn in crude oil for that call to play out,” Avery Shenfeld, chief economist at CIBC, said.

James Smith, developed markets economist at ING, noted that trade tensions remain a clear growth risk in 2019, although he expects the United-States-Mexico-Canada-Agreement to remove grey clouds from the investment outlook.

“We expect two rate hikes in 1Q19 and 3Q19, taking the policy rate towards the lower end of the BoC's estimate of the nominal neutral rate (2.5%-3.5%, based on at-target inflation). We're not ruling out a third hike next year either, depending on the strength of wage growth and if trade tensions remain in check,” Smith commented.

-- Reuters contributed to this report

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