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Bank of Canada keeps benchmark interest rate steady at 1%

Original Article HERE


The Bank of Canada has decided to keep its benchmark interest rate steady at 1 per cent.

The bank's rate, officially known as the target for the overnight rate, has a large impact on the rates that retail banks offer consumers on savings accounts and loans.


The bank has already hiked its rate twice this year — once in July and then again last month.


Those moves came amid signs that Canada's economy was heating up, but since then economic indicators have been more subdued, which helps to explain the bank's cautious tone.




"The current stance of monetary policy is appropriate," the bank said in announcing its decision. "While less monetary policy stimulus will likely be required over time, [the bank] will be cautious in making future adjustments to the policy rate."


Aubrey Basdeo, the head of fixed income at BlackRock Canada, said that word — "cautious" — could be just the right strategy. "They're trying to have a very measured approach in terms of removing stimulus," he said.


None of the economists polled by Bloomberg were expecting the bank to move its rate. But currency traders were caught a little by surprise — the Canadian dollar lost almost a full cent from where it was before the decision, changing hands at 78.15 cents US after the bank's decision came out.


"The Bank of Canada shifted to a significantly more cautious tone on interest rates Wednesday, prompting a sharp descent by the Canadian dollar," said Don Curren, strategist at Cambridge Global Payments, "and perhaps presaging more weakness in the currency as expectations about … monetary policy evolve."


Along with its rate decision, the bank also released its Monetary Policy Report, which comes out four times a year and provides a deeper dive into the bank's line of thinking. 


The bank said it expects inflation to rise to two per cent by the end of next year — a little later than expected, because of strength in the Canadian dollar.


According to the latest MPR, the bank expects Canada's economy to expand by 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019. The figure for next year is slightly better than the bank was forecasting three months ago, but the 2019 figure is a little worse.


One of the main reasons for that slight downgrade is a "shift toward protectionist trade policies" and "uncertainty around the outcome of the North American Free Trade Agreement (NAFTA) renegotiations," the bank said in its MPR.


The uncertainty around NAFTA  alone could be enough to explain the bank's caution.


"As things stand today," TD Bank economist Brian DePratto said, "it appears that the urgency to increase rates has faded."


While growth of just 1.5 per cent two years from now isn't an optimistic view, forecasting that far into the future always has to come with a grain of salt, Blackrock's Basdeo said.


BlackRock is slightly more optimistic than the bank, forecasting growth of 2.5 per cent in 2018.


"By all accounts the economy does look reasonably healthy," he said. "We think growth of 2.5 per cent is pretty darn good at this stage."





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