Bank of Canada holds interest rate, drops growth forecast for 2019

The bank also cut its 2019 growth forecast

Stephen Poloz, Governor of the Bank of Canada and Senior Deputy Governor Carolyn Wilkins make their way to hold a press conference at the National Press Theatre, in Ottawa on Wednesday, April 24, 2019. (THE CANADIAN PRESS/Sean Kilpatrick)

Stephen Poloz, Governor of the Bank of Canada and Senior Deputy Governor Carolyn Wilkins make their way to hold a press conference at the National Press Theatre, in Ottawa on Wednesday, April 24, 2019. (THE CANADIAN PRESS/Sean Kilpatrick)

The Bank of Canada has set aside discussion of interest rate hikes, at least until the economy re-emerges from what it predicts will only be a temporary slowdown.

The central bank kept its key interest rate unchanged Wednesday and appeared to be in no hurry to move the benchmark any time soon. Unlike the bank’s recent statements, the announcement made no mention of a need for future increases.

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The bank also cut its 2019 growth forecast, a number weighed down by its prediction the economy nearly ground to a halt at the start of the year.

The decision Wednesday to stand pat, which was widely expected, left the rate at a still-stimulative 1.75 per cent for a fourth-straight announcement. The pause has followed a strong stretch for the economy that saw governor Stephen Poloz introduce five rate hikes between mid-2017 and last fall.

The economy had been running close to full tilt for most of 2017 and 2018, the bank said, before a sudden deceleration in the final three months of last year.

Poloz said the changing conditions have made the bank “data dependent in both directions.”

“Given where we are today we think that rates are appropriate for this outlook,” Poloz told reporters in Ottawa.

“If there was a new, negative disturbance — that would be something we’d have to consider as fodder for whether interest rates needed to be revised down.”

The soft patch, which was more severe than the bank anticipated in January, was largely caused by a drop in oil prices and unexpectedly weak numbers for investment and exports. It also underlined how weaker-than-expected housing and consumption bogged down the economy.

The negative effects have spilled into 2019, said the bank, which also released its latest quarterly projections Wednesday.

The bank is now predicting growth in real gross domestic product of 1.2 per cent for 2019, down from its January forecast of 1.7 per cent. It also projected growth at an annualized rate of just 0.3 per cent in the first three months of 2019.

Poloz, however, was optimistic about the rest of the year and beyond — once Canada gets past what he called a “detour.”

The bank predicted the economy to pick up its pace in the second quarter on expectations of stronger housing activity, consumer spending, exports and business investment. It expects the economy to build momentum through 2019 before returning to above-potential growth of 2.1 per cent in 2020 and two per cent in 2021.

Poloz described the tone of the closed-doors policy discussion among governing council members as “a little bit skeptical of some of the most-negative data” that’s been coming in. He added the skepticism also goes both ways, which is why incoming data will be important.

“By all bits of analysis it’s a temporary thing, but we need the proof,” he said.

“The data from here will tell us what to do. But if our forecast is right, which I firmly believe it is, (then) what that means is that interest rates are more likely to go up than down over time.”

The bank said it will pay close attention to the evolution of household spending, oil markets and global trade policy.

Even with the anticipated improvements, the bank avoided mentioning future rate hikes in its statement Wednesday like it had in the past.

“Given all of these developments, governing council judges that an accommodative policy interest rate continues to be warranted,” the bank said.

“We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive.”

The central bank’s March rate announcement said there was “increased uncertainty about the timing of future rate increases.” The January statement said the benchmark would need to rise over time to a so-called neutral range that had been estimated at between 2.5 and 3.5 per cent.

In addition to the change in the statement’s language, the central bank also updated its estimate Wednesday of the neutral — or destination — range, which is the preferred level when the economy is running at full capacity and when inflation is within its target zone of one to three per cent.

The bank said its new, slightly lower estimated range is between 2.25 and 3.25 per cent.

Many economists expect the bank to leave the interest rate untouched until at least late in the year, and some have warned a cut could arrive before the next increase.

The Bank of Canada will make its next policy announcement on May 29.

Looking ahead, the bank projects a gradual expansion of investment outside the oil and gas sector before it turns into solid growth in the second half of 2019. It expects the boost to come with companies’ responses to capacity constraints, higher operating profits and investment incentives from the federal and Ontario governments.

Exports of goods and services, in particular, are expected to grow with a lift from foreign demand, though the bank noted there’s still uncertainty given global trade tensions.

The bank predicts consumption to continue expanding along with growing wages — even though households are burdened with high debt loads — and for the dampening effects of recent housing measures to fade over time.

Andy Blatchford, The Canadian Press

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