Published: Thu, April 19, 2018
Money | By Armando Alvarado

Bank of Canada holds interest rate: Read the official statement

Bank of Canada holds interest rate: Read the official statement

As the central bank's thinking surrounding these risks has evolved, it has zeroed in on the implications for holding back spending on new capacity for exports, which have struggled in recent months.

"The economy is projected to operate slightly above its potential over the next three years, with real GDP growth of about two per cent in both 2018 and 2019, and 1.8 per cent in 2020", the bank said in a statement.

That means that even with the stronger growth outlook, the economy has more room to grow without generating inflationary pressures.

The central bank repeated that "higher interest rates will be warranted over time", although rates need to remain accommodative to keep inflation on target.

'Some progress has been made on the key issues, particularly the dynamics of inflation and wage growth.

Though numerous key ingredients for higher rates are falling into place, the bank said it remains "cautious with respect to future policy adjustments".

The bank's go-slow stance on rate hikes is because the economy's capacity to grow is also expanding.

The bank is also keeping a close watch on the evolution of external risks.

While the Canadian dollar tends to strengthen around Bank of Canada interest rate decisions (as the BoC is now hiking rates), this isn't the case today.

It laid out estimates on the growth impacts on Canada due to tax reforms in the United States, which are expected to lure more investment south of the border. Due to these investment challenges, it predicts Canada's gross domestic product to be 0.2 per cent lower by the end of 2020.

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Exports are also expected to take a hit from reduced investment and trade uncertainties. The next scheduled date for announcing the benchmark rate is May 30.

Inflation has also risen close to the bank's target of 2.0 percent.

Canadian economic growth has in fact come off the boil over recent months with the economy contracting in January, marking the second monthly contraction since the BoC began to raise rates in July 2017. But due, in part, to factors such as mounting trade unknowns, Poloz has not raised the rate since January.

The USD/CAD exchange rate is now above 1.2580. The central bank will spend the next few months assessing how the competing factors influencing investment and capacity growth are affecting inflation, and let that signal the appropriate course for rate hikes.

Housing and exports were the drivers of that weakness, but the bank expects a boost from increased foreign trade, plus higher wages for Canadians.

Many analysists weighed in following the decision, saying the bank's comments and forecasts for later in the year leave rate hikes on the table for 2018. Meanwhile, the average of the agency's three measures of core inflation, created to omit the noise of more-volatile items like gasoline, climbed slightly above two per cent for the first time since February 2012.

Further, the bank describes consumption growth as "robust", supported by strong labour growth.

The stats for March are predicted to show rising annual sales activity compared to March 2017, but slower monthly sales growth compared to February 2018. In January, the central bank had forecast potential growth for the next two years to average 1.6 percent.

It noted that these readings would still be slightly above Canada's estimated potential output for the next three years.

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