The central bank made the announcement from Ottawa this morning
The Bank of Canada kept borrowing costs on hold at its last interest rate decision of 2017 and reiterated it will be “cautious” with future moves, indicating it’s in no rush to cool an economy that is very close to capacity.
Policy makers led by Governor Stephen Poloz left the benchmark overnight rate at 1 percent Wednesday for a second straight rate decision, as the market expected. The current pause comes after consecutive hikes in July and September.
Even as it acknowledges borrowing costs will eventually need to rise, the Bank of Canada has been handling the normalization of rates very carefully, wary of inadvertently triggering another downturn. One argument, repeated Wednesday, is that geopolitical uncertainties remain around U.S. trade policies.
“While higher interest rates will likely be required over time, Governing Council will continue to be cautious,” the Ottawa- based central bank said in its statement. “The current stance of monetary policy remains appropriate.”
Higher rates will eventually be needed to account for an economy that’s been one of the strongest in the developed world with a jobs market on a tear. Even with an anticipated second-half slowdown, Canada is headed for 3 percent growth this year. Its unemployment rate, meanwhile, has fallen to the lowest in a decade.
By the central bank’s own measure, interest rates are still a full 2 percentage points below what it would consider “neutral.” Before Wednesday’s decision, investors were anticipating as many as three more hikes by the end of 2018, with the first likely in March.
Labor Slack
In its statement, the Bank of Canada gave a nod to the nation’s employment strength and recent wage gains. But it stuck to its assessment that excess labor capacity remains.
“Despite rising employment and participation rates, other indicators point to ongoing -- albeit diminishing -- slack in the labor market,” policy makers said.
The central bank cited buoyant global growth, higher oil prices and eased financial conditions, but cautioned the “global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies.”
It also said recent Canadian economic data are in line with its October projections, which “was for growth to moderate while remaining above potential in the second half of 2017.”
The central bank, meanwhile, downplayed recent revisions to gross domestic product that suggest historical output was higher than initially estimated, saying the new data may not necessarily imply tighter capacity conditions.
“Revisions to past quarterly national accounts have resulted in a higher level of GDP,” it said. “However, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output.”
Currency Language
One change in the statement was the removal of any reference to the Canadian dollar. In October, the dollar’s appreciation earlier this year was cited as a factor for slower exports. The loonie has, however, slumped since September.
One argument against rate increases has been weak inflation, which has undershot the central bank’s 2 percent target for years. Policy makers acknowledged a pick-up in core inflation measures that reflects “the continued absorption of economic slack”, while higher-than-anticipated headline inflation has been boosted in the “short-term by temporary factors, particularly gasoline prices.”
Copyright Bloomberg 2017
Related stories:
Investors make bets on likelihood of rate hike
Canadian economy grows 1.7% in Q3
Policy makers led by Governor Stephen Poloz left the benchmark overnight rate at 1 percent Wednesday for a second straight rate decision, as the market expected. The current pause comes after consecutive hikes in July and September.
Even as it acknowledges borrowing costs will eventually need to rise, the Bank of Canada has been handling the normalization of rates very carefully, wary of inadvertently triggering another downturn. One argument, repeated Wednesday, is that geopolitical uncertainties remain around U.S. trade policies.
“While higher interest rates will likely be required over time, Governing Council will continue to be cautious,” the Ottawa- based central bank said in its statement. “The current stance of monetary policy remains appropriate.”
Higher rates will eventually be needed to account for an economy that’s been one of the strongest in the developed world with a jobs market on a tear. Even with an anticipated second-half slowdown, Canada is headed for 3 percent growth this year. Its unemployment rate, meanwhile, has fallen to the lowest in a decade.
By the central bank’s own measure, interest rates are still a full 2 percentage points below what it would consider “neutral.” Before Wednesday’s decision, investors were anticipating as many as three more hikes by the end of 2018, with the first likely in March.
Labor Slack
In its statement, the Bank of Canada gave a nod to the nation’s employment strength and recent wage gains. But it stuck to its assessment that excess labor capacity remains.
“Despite rising employment and participation rates, other indicators point to ongoing -- albeit diminishing -- slack in the labor market,” policy makers said.
The central bank cited buoyant global growth, higher oil prices and eased financial conditions, but cautioned the “global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies.”
It also said recent Canadian economic data are in line with its October projections, which “was for growth to moderate while remaining above potential in the second half of 2017.”
The central bank, meanwhile, downplayed recent revisions to gross domestic product that suggest historical output was higher than initially estimated, saying the new data may not necessarily imply tighter capacity conditions.
“Revisions to past quarterly national accounts have resulted in a higher level of GDP,” it said. “However, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output.”
Currency Language
One change in the statement was the removal of any reference to the Canadian dollar. In October, the dollar’s appreciation earlier this year was cited as a factor for slower exports. The loonie has, however, slumped since September.
One argument against rate increases has been weak inflation, which has undershot the central bank’s 2 percent target for years. Policy makers acknowledged a pick-up in core inflation measures that reflects “the continued absorption of economic slack”, while higher-than-anticipated headline inflation has been boosted in the “short-term by temporary factors, particularly gasoline prices.”
Copyright Bloomberg 2017
Related stories:
Investors make bets on likelihood of rate hike
Canadian economy grows 1.7% in Q3
