Canada’s central bank is holding its overnight rate at 0.5%, it announced December 7.
Global conditions are strengthening, the Bank of Canada said, but uncertainty remains high, leaving business confidence and investment stagnant. The Bank pointed out that while the American economy is operating near full capacity, Canada continues to have a “significant amount of economic slack.”
“Unlike in past statements, the Bank refrained from making a statement regarding the risks to the inflation outlook, perhaps in part due to the elevated level of uncertainty about the direction of U.S. fiscal and trade policy under the new Administration,” said RBC deputy chief economist Dawn Desjardins in a note to investors.
“The Bank’s only reference to the U.S. election was to point to the sharp rise in global bond yields that occurred since November 8 as markets priced in expectations that the new government will implement a fiscal stimulus plan that will support stronger economic growth.”
Douglas Porter, chief economist at BMO, said the overall tone of the Bank’s statement was downbeat and serves “as a stark reminder that Canadian short-term rates in no way, shape or form will follow the U.S. lead higher.”
“Barring some massive shock, the Bank appears to be very comfortable staying on the sidelines for some time yet,” Porter said.
The central bank said the low Canadian dollar is yet to translate into stronger exports, which remain disappointing, having fallen 1% year-over-year. This comes in spite of better-than-expected GDP data.
Household imbalances have risen once again, but the Bank said “these will be mitigated over time by announced changes to housing finance rules.”
Total CPI inflation has increased but remains below expectations, in large part due to low food prices, which are expected to increase next year. Core inflation is near the 2% target.
Porter said overall, conditions in Canada are unchanged from the Bank’s last announcement in October.
“With fiscal policy expected to kick in more obviously in Canada as well as the U.S. next year and oil prices seemingly holding a firmer floor with the OPEC deal, the Bank appears perfectly content to stay on hold,” Porter said.
“No doubt, the back-up in bond yields is unwelcome by the Bank, but we judge that overall financial conditions in Canada are broadly unchanged since the October meeting, mainly thanks to the equity rally.”
The Canadian dollar gained two-tenths of a cent after the announcement relative to the U.S. dollar. As of press time, the loonie was trading around 75.5 cents U.S.
@EmmaHampelBIV
