Bank of Canada Cites Trade Issues In Decision To Leave Interest Rates Unchanged

The Bank of Canada singled out disruptive trade issues when announcing its decision to keep its benchmark interest rate on hold for the time being.

In explaining its decision to maintain its key interest rate at its current level of 1.25%, the central bank noted that recent trade policy developments have created uncertainty around the outlook for the Canadian and global economies.

U.S. President Donald Trump recently added threats of steel and aluminum tariffs to an already uncertain context for Canada that include a contentious NAFTA renegotiation and fears over competitiveness following corporate tax cuts south of the border. Considerable uncertainty is also developing around Canada’s housing market.

“Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks,” the central bank said in its statement Wednesday.

The Bank of Canada also noted in its decision that fourth-quarter growth was weaker than expected, largely due to higher imports, and that it’s still assessing impacts on housing markets from new government policies, including recent changes to mortgage rules.

But the Bank of Canada also said global growth continues to be solid and broad-based, the economy is running at or near capacity, inflation is close to target and wage growth has improved. For the U.S., the bank predicted fresh government spending and the tax reductions would likely lift growth in 2018 and 2019.

Economists had widely expected the central bank to stand pat on interest rates this time. But in its statement Wednesday, Canada’s central bank reiterated that it expects more interest rate hikes to be necessary over time, but that the governing council will remain cautious when considering future decisions on raising rates.

“The council will continue to be guided by incoming data, such as the economy’s sensitivity to higher rates, the evolution of economic capacity and changes to wage growth and inflation,” it said. In monitoring the country’s housing data, the bank said a surge of strong numbers in late 2017 was followed by softer figures so far this year.

The central bank’s next interest rate announcement is scheduled for April 18, when it will also publish its updated economic projections. The Bank of Canada said the impacts on inflation and growth from commitments in last month’s federal budget would be incorporated into its April projections.