The Bank of Canada is seen Wednesday in Ottawa. THE CANADIAN PRESS/Adrian Wyld

The Bank of Canada is seen Wednesday in Ottawa. THE CANADIAN PRESS/Adrian Wyld

Central bank holds rate amid oil slump casts doubt on future hikes

OTTAWA — The Bank of Canada left its trend-setting interest rate untouched Wednesday as fresh economic developments — including the sharp drop in oil prices — threatened to delay future hikes.

The central bank’s decision Wednesday maintained its trend-setting rate at 1.75 per cent. It followed a quarter-point increase at the bank’s previous policy meeting in October.

Thanks to the strengthened economy, the bank has been on a gradual rate-hiking path for more than a year and has already raised the benchmark five times since the summer of 2017.

But the timing of upcoming rate increases, the bank said, will now depend on several new factors that have emerged in recent weeks. The elements include the extent of the crude-price slump, the ability of corporate investment to pick up its pace and how much room the overall economy still has left to grow without stoking inflation.

“(They) will also factor importantly into our decisions about the future stance of monetary policy,” the bank said Wednesday in a statement.

The new considerations add to other factors the bank has been studying to determine just how quickly it should raise the rate.

The bank repeated Wednesday that future hikes also hinge on changes in global trade policies as well as how higher interest rates from past increases affect consumption and housing.

The central bank raises the interest rate to prevent inflation from climbing too high. The Bank of Canada has estimated it will need to gradually raise the interest rate until it reaches a level between 2.5 and 3.5 per cent.

Heading into Wednesday’s announcement, however, market watchers had widely expected governor Stephen Poloz to hold off until at least his January meeting before introducing the next rate increase.

Following the decision, many experts now expect Poloz to wait even longer.

Sebastien Lavoie, Laurentian Bank’s chief economist, said the wording of the Bank of Canada’s statement signals a shift from its message at the October meeting when it seemed to be looking “more aggressively” at speeding up the pace of rate hikes.

“Now, they’re not sure anymore,” Lavoie said in an interview.

“We think the odds of a hike at the Jan. 9 meeting, in just a bit more than a month, has fallen significantly.”

TD senior economist Brian DePratto wrote about Wednesday’s rate decision in a research note: “To be sure, while everything points to a January hike being off the table, the path thereafter is less clear, and a 491-word statement does not give much to work with.”

DePratto added that Poloz’s speech in Toronto on Thursday will carry more significance than usual given all the moving parts in the Canadian economy right now.

When it comes to crude, the central bank blamed the steep slide in prices on the combination of geopolitical developments, uncertainty about the outlook for global growth and the expansion of American shale oil production.

The price of western Canadian oil, the bank added, has fallen further than other benchmarks because of transportation constraints that have led to production cuts.

“Activity in Canada’s energy sector will likely be materially weaker than expected,” the statement said.

Recent data, the bank noted, also show the economy has less momentum heading into the final quarter of 2018. The bank says it’s related to factors such as a drop in business investment, which it largely connects to the significant uncertainty around trade last summer.

The bank expects corporate investment to improve — outside the energy sector — following last week’s signing of the updated North American trade agreement, new federal tax incentives and ongoing pressure from rising demand.

It will also be watching for positive developments such as more signs the economy can still expand without fuelling inflation. The bank pointed to recent downward revisions to gross domestic product data that suggested there’s still some space for non-inflationary growth.

The bank, which tries to keep inflation within its target band of one to three per cent, noted that October’s inflation reading of 2.4 per cent was above its ideal two per cent bull’s-eye. However, due to weaker gasoline prices, it is now predicting inflation to move down in the coming months by more than its previous forecast.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

ATB Economics released new vehicle sales stats for November. (Contributed by ATB Economics)
2020 will be remembered as tough year for new car and truck dealers in Alberta

ATB Economics releases new vehicle sales stats for November

Red Deer city council gave initial approval for more mixed-use developments in Riverside Light Industrial Park. (File photo by Advocate staff)
More industrial landowners in Red Deer are pursuing mixed-use zoning

A third of Riverside Light could become a commercial/industrial district

Central Alberta man facing second-degree murder in connection with December death.
Advocate file photo
Central Alberta man facing second-degree murder in connection with December death

Maskwacis RCMP said female found dead in Ermineskin Cree Nation residence last December

Red Deer College has been working towards obtaining university status for a couple of years. (File photo by Advocate staff)
Red Deer College’s university status back in question

Red Deer College should be worried that its university dreams could be… Continue reading

Justin Kripps of Summerland and his team have competed in Olympic action and World Cup competitions in bobsleigh. (Jason Ransom-Canadian Olympic Comittee).
QUIZ: Are you ready for some winter sports?

It’s cold outside, but there are plenty of recreation opportunities in the winter months

Montreal Canadiens down Edmonton Oilers 3-1, sweep series

Montreal Canadiens down Edmonton Oilers 3-1, sweep series

Toronto Raptors forward Pascal Siakam (43) loses the basketball as he tries to drive around Dallas Mavericks center Willie Cauley-Stein (33) during the second half of an NBA basketball game Monday, Jan. 18, 2021, in Tampa, Fla. THE CANADIAN PRESS/AP-Chris O'Meara
Lowry leads the way as Raptors down the Mavericks for their third straight win

Lowry leads the way as Raptors down the Mavericks for their third straight win

Johnny Gaudreau’s goal and assist paces Flames to 5-2 victory over Canucks

Johnny Gaudreau’s goal and assist paces Flames to 5-2 victory over Canucks

Conservative Leader Erin O'Toole holds a press conference on Parliament Hill, in Ottawa, on Dec. 10, 2020. THE CANADIAN PRESS/Sean Kilpatrick
Tory MP Sloan accuses party of hypocrisy over efforts to have him expelled

Tory MP Sloan accuses party of hypocrisy over efforts to have him expelled

FILE - In this Tuesday, Jan. 15, 2019 file photo Britain's Andy Murray reacts during a press conference following his first round loss to Spain's Roberto Bautista Agut at the Australian Open tennis championships in Melbourne, Australia. Former world number one Murray's participation at the upcoming Australian Open is in doubt after the Briton tested positive for COVID-19. (AP Photo/Kin Cheung, File)
Australian Open arrivals hit by 3 COVID-19 positive tests

Australian Open arrivals hit by 3 COVID-19 positive tests

Toronto Maple Leafs right wing Mitchell Marner (16) scores on an empty net and takes a hit from Winnipeg Jets defenceman Neal Pionk (4) during third period of action in Toronto on Monday, January 18, 2021. THE CANADIAN PRESS/Nathan Denette
Toronto Maple Leafs ride dominant second period to down Winnipeg Jets 3-1

Toronto Maple Leafs ride dominant second period to down Winnipeg Jets 3-1

Roman Sadovsky wins the Challenge, his only event of the figure skating season

Roman Sadovsky wins the Challenge, his only event of the figure skating season

Belarusian President Alexander Lukashenko, left, speaks with International Ice Hockey Federation President Rene Fasel during their meeting in Minsk, Belarus, Monday, Jan. 11, 2021. (Nikolai Petrov/BelTA Pool Photo via AP)
IIHF pulls hockey worlds from Belarus, seeks new host

IIHF pulls hockey worlds from Belarus, seeks new host

Most Read