The Bank of Canada (BOC), which has raised its rate three times since July 2017 - most recently in January - said its governing council would "remain cautious in considering future policy adjustments" and be guided by the economy's sensitivity to interest rates, economic capacity, the growth of wages and inflation.
Canada's dollar has weakened this year in response to uncertainties around the ongoing talks about the North American Free Trade Agreement (NAFTA), with another bout of uncertainty injected into financial markets from President Donald Trump's plans to slap tariffs on steel and aluminum imports.
"Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks," BOC said, adding that global growth still remains solid and new spending by Washington along with tax cuts will boost growth this year and in 2019.
The Canadian dollar, known as the loonie, was trading at 1.299 to the U.S. dollar today, down 3 percent this year.
Headline inflation in Canada eased to 1.7 percent in January from 1.9 percent in December while core inflation has edged up, reflecting an economy that is operating near capacity, BOC said, adding that wage growth had firmed but is still below levels that would be typical in an economy with no slack.
Canada's economy grew by 3.0 percent last year, in line with the BOC's projection from January, with growth in the fourth quarter slightly weaker than expected due to higher imports while exports only made a partial recovery from a third quarter drop.
At its next meeting in April, the BOC will update its outlook to include the implications of the latest federal budget and a pulling forward of housing demand ahead of new mortgage guidelines and other policy measures.
The Bank of Canada released the following statement:
"The Bank of Canada today maintained its target for the overnight rate at 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent.
Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.
In Canada, the national accounts data show that the economy grew by 3 per cent in 2017, bringing the level of real GDP in line with the projection in the Bank’s January MonetaryPolicy Report (MPR). In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economy’s capacity.
Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand ahead of new mortgage guidelines and other policy measures. It will take some time to fully assess the impact of these, as well as recently announced provincial measures, on housing demand and prices. More broadly, the Bank continues to monitor the economy’s sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Bank’s April projection.
Inflation is running close to the 2 per cent target and the Bank’s core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.
In this context, Governing Council maintained the target for the overnight rate at 1 1/4 per cent. While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation."
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