Central bank ‘surprised’ by weak data before longer slump call, rate-hike doubts

OTTAWA — A weak data report “surprised” the Bank of Canada ahead of its decision to cast doubts about future interest-rate hikes and to warn Canadians the ongoing slump could prove to be unexpectedly stubborn, says one of the bank’s top officials.

Deputy governor Lynn Patterson said in a speech Thursday that the central bank had been expecting a growth slowdown in the energy sector over the final three months of 2018, particularly after the oil-price drop late in the year.

But policy-makers were caught off guard when last Friday’s Statistics Canada report showed a sudden deceleration in the fourth quarter for other categories as well, Patterson said.

Days later, on Wednesday, the Bank of Canada held its trend-setting interest rate at 1.75 per cent.

The decision to hold off was widely expected — but, in an accompanying news release, the bank raised considerable doubts about the timing of any future rate increases.

It also warned the first half of 2019 — and not just the first quarter as it had predicted in January — appeared to be on track for additional economic disappointment.

Patterson’s speech offered hints of the closed-door deliberations behind the decision.

“Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected,” she said in the address to the Hamilton Chamber of Commerce.

“While the anticipated slowdown from the energy sector was fairly aligned with our projections, other categories surprised.”

She repeated a line from the central bank’s statement Wednesday that said there is now “increased uncertainty” about the timing of future rate hikes.

Many analysts don’t expect the central bank to raise the benchmark until at least late 2019 — and some have started to suggest a rate cut could arrive before the next increase.

Ahead of Wednesday’s rate announcement, Patterson said governing council members were confronted by softer-than-anticipated fourth-quarter numbers in the areas of business investment, exports and household spending.

She drilled down deeper into some of the numbers.

Canadians, she told her audience, spent less on discretionary options like new cars, vacations, restaurants and entertainment. When it came to housing, she noted the “biggest negative surprise” in the fourth quarter came from spending on home renovations.

To explain the weakness in business investment, Patterson said while many companies were encouraged by the successful negotiations towards an updated North American trade pact, many were still holding off for the deal’s ratification.

Other investments may have been postponed as firms waited for the federal government to introduce long-promised changes to address competitiveness concerns, she said. Ottawa’s business-focused tax measures were announced in November.

The bank’s policy decision and statement this week also came after governing council factored in the slowing global economy, which has been affected by trade tensions — particularly those between the United States and China — and other uncertainties, Patterson added.

“Some major central banks have changed their communications in recognition of softer global economic momentum,” she said.

“Here at home, Canadian data are reflecting this slower global momentum. In that regard, governing council spent a lot of time discussing the national accounts data for the fourth quarter of last year.”

Looking ahead, however, Patterson said the Bank of Canada is optimistic that economic growth will build new momentum in the second half of 2019, thanks in large part to the still-strong employment conditions and improving wages.

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