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Bank of Canada keeps rates unchanged on weaker economic outlook

10 March 2019

In Canada, the BoC also expects the economy to be weaker in the first half of 2019 than it projected in January, adding it is watching developments in household spending, oil markets and global trade.

The Bank of Canada kept its overnight rate unchanged at 1.75% this morning, as was widely expected.

Not only has the slowdown been deeper than expected, but Statistics Canada's downward revisions to growth in the first half of past year suggest there may have been more excess capacity going into the slump than previously thought.

A benign interest rate environment in light of the central bank's decision Wednesday is supportive for those sectors, says Anish Chopra, managing director with Portfolio Management Corp.

"Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook".

Doubts raised this week by the Bank of Canada about future interest-rate hikes and its prediction of a longer slump came after governing council was caught off guard by surprisingly weak data in a recent report, one of its top officials said Thursday.

That line will reinforce the emerging consensus that the Bank of Canada's quest for higher interest rates is over.

Last October, the Bank of Canada hiked the rate to 1.75%, marking the highest rate in almost a decade and the fifth consecutive increase since mid-2017.

A Reuters poll last week found that most economists expect one more hike in 2019, though not until the third quarter, with a further hike expected in 2020.

The loonie fell 0.7 per cent to $1.3439 per us dollar, touching the weakest since January 4 and paring its 2019 advance to 1.5 per cent. Yields on two-year Canadian government bonds dropped 8 basis points to 1.66 per cent, the lowest since December.

Similarly, they assumed Canada's economy would stumble, but the fall in the fourth quarter was "sharper and more broadly based" than they predicted, the statement said. Further, the greater uncertainty and data dependence highlighted by the Bank of Canada could provide a tailwind for the United States dollars moving forward as the language is priced in to the market's expectation of future rate hikes.

The value of Canadian building permits fell by 5.5 per cent in January from December, Statistics Canada said.

"Consumer spending and the housing market were soft, despite strong growth in employment and labour income", the statement said. Overall exports saw a slight decline and household spending slowed for a second straight quarter. Trade tensions and uncertainty continue to dampen these components of growth. It is hard to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts. Meanwhile, progress in U.S.

Bank of Canada keeps rates unchanged on weaker economic outlook