The Bank of Canada (BOC), which kept its rate steady in December and January after raising its rate in October for the fifth time since July 2017, said the current outlook continues to warrant a policy interest rate that is below its neutral range, a sharp change to its guidance in January that the rate will need to gradually rise into a neutral range to meet the inflation target.
The BOC has estimated a neutral interest rate of between 2.5 and 3.5 percent, which implied a least three more rate hikes.
"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," BOC said, adding "with increased uncertainty about the timing of future rate increases," it will be closely watching household spending, oil markets and global trade policy.
Canada's economy slowed sharply in the fourth quarter of 2018 as gross domestic product grew by only 0.1 percent from the previous quarter as business investments fell, growth in household spending slowed further and prices of crude oil exports fell.
BOC had expected a temporary slowdown in the fourth quarter of 2018 and the first quarter of this year due to lower oil prices, but both exports and business investments fell short of expectations and trade tensions and uncertainty are still weighing heavily on confidence and economic activity.
"It is difficult 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," BOC said, adding:
"After growing at a pace of 1.8 percent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January."
In its January monetary policy report, BOC cut its 2019 growth forecast to 1.7 percent from October's forecast of 2.1 percent but raised the 2020 growth forecast to 2.1 percent from 1.9 percent. The next update to the forecast is in April.
Inflation has also been slowing and dropped to 1.4 percent in January from 2.0 percent in December, cementing expectations the BOC would maintain rates today and dampen expectations of interest rate hikes, a prediction that came true.
But Canada's labour market remains buoyant, with employers adding 66,800 jobs in January and average hourly wages of permanent, which is watched by BOC, up by 1.8 percent in January after a 1.5 percent rise in December following largely static wages in the previous 5 months.
The unemployment rate rose to 5.8 percent from 5.6 percent in the previous two months as more people looked for work.
In January the BOC lowered its forecast for headline inflation due to lower gasoline prices to 1.7 percent for 2019 from a previous 2.0 percent before returning to the BOC's 2.0 percent target in 2020.
In today's statement BOC said core inflation was still close to 2.0 percent and it expects consumer price inflation to be slightly below its target throughout most of this year, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
After depreciating from September 2017 through 2018, the Canadian dollar, known as the loonie, has firmed this year though it has dropped in the last week and fell in response to the BOC's policy decision.
The Canadian dollar fell to 1.34 against the U.S. dollar, down 1.5 percent this year and down 6 percent since the start of 2018.The Bank of Canada released the following press release:
"The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report(MPR). While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult 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.
Many central banks have acknowledged the building headwinds to growth, and financial conditions have eased as a result. Meanwhile, progress in US-China trade talks and policy stimulus in China have improved market sentiment and contributed to firmer commodity prices.
For Canada, the Bank was projecting a temporary slowdown in late 2018 and early 2019, mainly because of last year’s drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces. However, the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.
Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices. The Bank expects CPI inflation to be slightly below the 2 per cent target through most of 2019, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range. 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. With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy."
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