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

OTTAWA – The Bank of Canada is keeping its key interest rate target on hold at 1.75 per cent and forecasting a slower-than-expected start for the Canadian economy in 2020.

In its latest 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.

While some of the slowdown late last year is being chalked up to a strike at CN Rail and an outage at the Keystone pipeline, the central bank says the weaker figures could also signal that global uncertainty is affecting Canada more than previously predicted.

Bank of Canada governor Stephen Poloz said indicators of the Canadian economy have turned decidedly mixed.

”Much of governing council’s deliberations focused on how persistent this recent slowdown in the domestic economy might be,” he said.

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’s outlook is for a rebound in growth to about 1.3 per cent in the first quarter and a pickup to about two per cent after that.

In making its rate decision, Poloz said the bank weighed the risk that inflation could fall short of target against the risk that a lower interest rates would lead to higher financial vulnerabilities.

”Governing council will be watching closely to see if the recent slowdown in growth is more persistent than forecast. In assessing incoming data, the bank will be paying particular attention to developments in consumer spending, the housing market and business investment,” Poloz said.

The picture the bank painted in its report Wednesday was in sharp contrast from its last look at the economy, when a degree of domestic resilience remained in spite of weaker data points outside Canada’s borders.

There is ”considerable uncertainty” about how long household spending may stay soft, the report said, as households are expected to be more cautious with their spending decisions and save more in the face of high levels of debt – all this despite a federal tax cut that kicked in on Jan. 1 and growth in wages.

The bank suggested weakness in the manufacturing sector and a tightening of provincial purse strings may have a dampening effect on the economy.

Bank of Montreal chief economist Doug Porter called it a ”dovish surprise” from the Bank of Canada which he said had sounded generally sanguine in its outlook for the economy in recent weeks.

”While we can all debate the merits of that view, there is no debating that the bank has an easing bias, and further significant disappointments on jobs and/or spending could prompt them to act on that bias,” Porter wrote in a report.

However, Porter said he believes that growth will bounce back more than the central bank is expecting.

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 bank’s October forecast of 1.8 per cent.

The outlook for the economy could change if the Trump administration follows through on threats to slap tariffs on France, Brazil and Argentina.

The report also cites as a risk ongoing tensions between the United States and Iran, which has already led to the tragic downing of a Ukrainian passenger jet with Canadians onboard. An escalation could roil the Middle East and likely increase the price of oil, leading to higher gas prices across the country.

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