Bank of Canada holds interest rate steady at 1.75%, citing trade tensions

The Bank of Canada is leaving its key interest rate unchanged in an announcement that balances domestic economic improvements with an expanding global slowdown caused by trade conflicts.

The decision Wednesday kept the interest rate at 1.75 per cent for a sixth-straight meeting, as Canada rebounds from a weak stretch that nearly brought the economy to a halt in late 2018 and early 2019.

Poloz and the governing council appeared to be in no rush to change the rate, even as they noted policy-makers in the U.S. and Europe have signalled they may introduce cuts to respond to weakened global economic activity.

"Recent data show the Canadian economy is returning to potential growth," the Bank of Canada said in a statement.

"However, the outlook is clouded by persistent trade tensions. Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate."

Fall out from trade tensions

The Bank of Canada, which was widely expected to stand pat Wednesday, said it will continue to monitor data ahead of future decisions with a particular focus on developments in the energy sector and the effects of global trade tensions.

Fallout from the uncertain international trade environment was also reflected in the bank's updated economic projections, which were also released Wednesday in the bank's quarterly monetary policy report.

The bank downgraded its 2019 global growth forecast to three per cent from 3.2 per cent due to trade disputes the U.S.-China fight, in particular that have rippled through the world's economy.

"Escalating trade conflicts, geopolitical tensions and related uncertainty are contributing to the broad-based slowdown of global economic activity," the bank said in its report.

The wider trade-related fights and, in some cases, direct actions are having an impact on Canada.

China's recent trade actions on meat and canola products from Canada are expected to lower exports by 0.2 per cent, the bank said. The changes, including stricter inspections on Canadian goods by Chinese authorities, have come amid a bilateral diplomatic dispute.

The bank predicted economic growth in Canada this year of 1.3 per cent, up slightly from its April forecast of 1.2 per cent, and an expansion of 1.9 per cent in 2020, down from its previous call of 2.1 per cent.

The Bank of Canada raised its forecast for second-quarter growth to annual pace of 2.3 per cent, up from its April projection of 1.3 per cent, following the stronger-than-expected rebound from the slowdown at the start of the year. It predicted growth an annual pace of 1.5 per cent for the third quarter.

Healthy job market helping economy

The unexpectedly robust bounce back, the bank said, was due to temporary factors such as a recovery from weather-related weaknesses and a boost in oil production.

Consumption in Canada is being supported by the healthy job market and rising wages, while the housing market at a country-wide level is stabilizing, the bank said. In addition, climate-related incentive payments from the federal government, which are front-loaded, could also provide a temporary boost to household spending.

The Canadian economy ran at close to full tilt for most of 2017 and 2018 a stretch that saw Poloz hike the interest rate five times. A sharp drop in oil prices in late 2018 prompted the bank to hit pause and it hasn't raised the rate since last October.

Candice Bangsund, vice-president and portfolio managerof global asset allocation forFiera Capital, said the Bank of Canada's decision not to cut rates is "largely justified given the latest economic developments in Canada."

"Oil production has recommenced, exports have spiked, business confidence has improved, and domestic conditions remain stable thanks to supportive labour market trends (record-low unemployment,surging wages)," Bangsund said in a written statement.

Brian DePratto, senior economist for TD Economics, said the monetary report and interest rate decision support TD's view that the Bank of Canada "will stand pat" on rates as the domestic economy settles into a steady pattern of growth.

"They would likely need to see more of the downside risks materialize in hard data to alter that position, with trade tensions topping the list," he said in a written response to the update.

James Laird, co-founder of Ratehub Inc. and president of CanWise Financial mortgage brokerage, said the announcement is "welcome news for Canadians considering a variable rate mortgage."

"In the absence of major economic changes, the bank seems intent to maintain this policy interest rate in the near future," he said in a written statement.