The Bank of Canada (BOC), which has kept its rate steady since October 2018 in contrast to this year's rapid pace of global monetary policy easing, added its October forecast for the global economy appeared to be intact and sounded a relatively upbeat tone about the outlook.
"There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years," BOC said, adding the ongoing trade conflicts are still weighing on global economic activity and remain the biggest source of risk to the outlook.
In October BOC lowered its forecast for 2019 global economic growth to 2.9 percent from 3.0 percent as trade conflicts, most notably between the U.S. and China, has led to a fall in global trade, with the slowdown most pronounced in business investments and the manufacturing sector.
In response to the global growth slowdown, central banks worldwide have eased their policy and BOC saw growth strengthening modestly in 2021, with a pickup in some emerging market economies more than offsetting slower growth in the United States and China.
Lower investments and commodity prices have hit Canada's economy and BOC in October also lowered its 2020 forecast for economic growth in Canada for the second time to 1.7 percent from an earlier forecast of 1.9 percent due to the impact on Canadian exports.
But BOC's forecast for 2019 growth was raised to 1.5 percent from an earlier 1.3 percent and in January it will update its forecast, taking into account fiscal policy following the re-election of Prime Minister Justin Trudeau in October.
Due to a decline in exports, Canada's economy slowed in the third quarter to 1.3 percent year-on-year from 1.6 percent in the second quarter but BOC said activity was supported by consumer spending, stronger wage growth and housing investment, along with an unexpected increase in investments in transportation and engineering projects.
"The Bank will be assessing the extent to which this points to renewed momentum in investment," BOC said.
In the third quarter business investment grew 2.6 percent, the fastest pace since the fourth quarter of 2017 while housing investment rose 3.2 percent, the highest since first quarter 2012.
Canada's inflation rate has been steady at 1.9 percent in the last three months to October and BOC continues to expect inflation to track close to its 2.0 percent target in the next two years.
Canada's dollar rose 0.6 percent in response to the BOC's statement to 1.32 to the U.S. dollar to be up 3.0 percent this year.
The Bank of Canada issued the following statement:
"The Bank of Canada today maintained its target for the overnight rate at 1 ¾ percent. The Bank Rate is correspondingly 2 percent and the deposit rate is 1 ½ percent.
The Bank’s October projection for global economic growth appears to be intact. There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years. Financial markets have been supported by central bank actions and waning recession concerns, while being buffeted by news on the trade front. Indeed, ongoing trade conflicts and related uncertainty are still weighing on global economic activity, and remain the biggest source of risk to the outlook. In this context, commodity prices and the Canadian dollar have remained relatively stable.
Growth in Canada slowed in the third quarter of 2019 to 1.3 percent, as expected. Consumer spending expanded moderately, underpinned by stronger wage growth. Housing investment was also a source of strength, supported by population growth and low mortgage rates. The Bank continues to monitor the evolution of financial vulnerabilities related to the household sector. As expected, exports contracted, driven by non-energy commodities. However, investment spending unexpectedly showed strong growth, notably in transportation equipment and engineering projects. The Bank will be assessing the extent to which this points to renewed momentum in investment.
CPI inflation in Canada remains at target, and measures of core inflation are around 2 percent, consistent with an economy operating near capacity. Inflation will increase temporarily in the coming months due to year-over-year movements in gasoline prices. The Bank continues to expect inflation to track close to the 2 percent target over the next two years.
Based on developments since October, Governing Council judges it appropriate to maintain the current level of the overnight rate target. Future interest rate decisions will be guided by the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy – notably consumer spending and housing activity. Fiscal policy developments will also figure into the Bank’s updated outlook in January."
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