Bank of Canada keeps key rate target on hold, trims growth expectations for 2020

Bank of Canada keeps key rate target on hold, trims growth expectations for 2020

OTTAWA — The Bank of Canada kept its key interest rate on hold at 1.75 per cent Wednesday in the face of a slower-than-expected start to 2020 for the Canadian economy, but governor Stephen Poloz left the door open to an rate cut if the weakness is more persistent than expected.

In its latest quarterly forecast, the central bank predicted the Canadian economy will grow by 1.6 per cent this year, down 0.1 of a percentage point from its projection in October.

Some of that change was the result of a strike at CN Rail and an outage at the Keystone pipeline, and global uncertainty around trade and geopolitical tensions affecting Canada more than previously predicted.

Governor Stephen Poloz said the central bank will be paying particular attention to developments in consumer spending, the housing market and business investment.

“I’m not saying that the door is not open to an interest rate cut — obviously, it is. It is open. But it hinges on how the data evolve from here,” Poloz told a news conference.

“We have a strong belief that this will prove temporary, but temporary could be longer or shorter and to the extent that it’s longer, that opens up a larger output gap, puts more downward pressure on inflation and we would have to come back to that decision.”

The decision to keep the interest rates on hold places some of the onus on Ottawa to spur growth with government spending, something the Finance Minister has conceded.

Finance Minister Bill Morneau suggested at the launch of pre-budget consultations earlier this month that government fiscal policy, rather than the central bank’s monetary levers, would have to used in the face of challenges to the Canadian economy.

“Historically, when the economy has faced challenges, central banks have reduced interest rates,” Morneau told students at Toronto’s Ryerson University on Jan. 13, “but given that interest rates are already at a low rate, that tool is not there in the same way, which means that the response to economic challenge is much more about investments that the government can make.”

Experts and the parliamentary budget officer have suggested the government spending will be more constrained because of deeper-than-planned deficits this fiscal year and next. Tightening of provincial purse strings may also have a dampening effect on the economy, the bank noted in its forecast.

Government spending plans “so far, look to only provide a very small dose of fiscal stimulus overall,” CIBC chief economist Avery Shenfeld wrote in a note to clients.

The Canadian Chamber of Commerce said the picture the central bank painted Wednesday required the Trudeau government to create a national economic strategy to address the country’s “declining competitiveness.”

“Like many of our G7 peers, we have entered an era of low interest rates and sluggish growth as our economy has not been able to build any sustainable momentum,” Trevin Stratton, the chamber’s chief economist, said in a statement.

There is “considerable uncertainty” about how long household spending may stay soft, the Bank of Canada report said, as households are expected to be more cautious buyers and save more in the face of high levels of debt — all this despite the targeted, income-tested federal tax cut that kicked in Jan. 1.

The Bank of Canada said that recent indicators of Canadian economic health have been mixed.

Poloz noted that vehicle sales, retail sales more generally, consumer confidence and job growth all softened at the end of last year, however he said third-quarter investment spending was surprisingly strong.

The Bank of Canada estimated the economy slowed to an annual growth rate of 0.3 per cent in the fourth quarter — due in part to temporary factors such as the CN strike, but predicted a rebound to about 1.3 per cent annual rate in the first quarter of 2020, picking up to an annual rate of about two per cent after that.

Bank of Montreal chief economist Douglas Porter said the bank had sounded generally sanguine in its outlook for the economy in recent weeks, but may succumb to an “easing bias” if job numbers or spending underperform further.

The Bank of Canada said ratification of the new North American free trade deal — a top priority for the Trudeau Liberals now that the U.S. and Mexico have completed their processes — and a partial trade detente between the United States and China should help stoke economic fires in Canada.

Growth for 2021 is forecast at two per cent, up from the 1.8 per cent in the bank’s October forecast and Morneau’s fiscal update from December.

But the central bank warned the economic outlook could change if the Trump administration follows through on threats to slap tariffs on France, Brazil and Argentina, or if tensions continue to escalate between the United States and Iran, which could roil the Middle East and likely increase the price of oil, leading to higher gas prices across the country.

This report by The Canadian Press was first published Jan. 22, 2020.

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