Bank of Canada holds rates but talks of more hikes, boosting C dollars

Investment in the Canadian oil and gas sector would decline by about 12 percent in 2019, compared with the 1.5 percent drop it predicted in October, it said.

Photo : Reuters / Chris Wattie

 

The Bank of Canada held interest rates steady as expected on Wednesday but said more increases would be necessary even though low oil prices and a weak housing market will negatively affect the economy in the short term.

The bank has raised rates five times since July 2017 and as recently as last month said the pace of tightening could be sped up depending on economic data. It made clear on Wednesday, however, that such talk was off the board for now.

“Governing Council continues to judge that the policy interest rate will need to rise over time,” it said in a statement. The bank had not previously used the words “over time” to describe how fast tightening could occur.

The talk of further hikes helped boost the Canadian dollar, which extended earlier gains, touching 1.3186 to the U.S. greenback, or 75.84 U.S. cents.

“It’s a bit more hawkish than the market expected … at this point, the market was expecting that maybe we are done,” said Benjamin Tal, deputy chief economist at CIBC World Markets.

The central bank cut its near-term growth forecasts to reflect the impact of crude prices but said the slowdown should be temporary and predicted the economy would post above-potential growth in 2020.

The bank noted that much of the economy was operating close to capacity but said consumption spending and household investment had been weaker than expected as housing markets adjusted to tougher mortgage rules and higher interest rates.

Looking ahead, the bank said exports and non-energy investment were expected to grow solidly, moved forward by foreign demand, a new North American free trade pact, a weaker Canadian dollar and federal tax measures aimed at investment.

The bank noted signs that the U.S.-Chinese trade war was hitting global demand and commodity prices but adopted a positive long-term outlook.

“Indicators of demand should start to show renewed momentum in early 2019, leading to above potential growth of 2.1 percent in 2020,” it said.

The bank held its overnight interest rate at 1.75 percent, well below the “neutral” rate of 2.5 percent to 3.5 percent, where monetary policy is neither stimulative or accommodative.

“We still expect further modest tightening this year … they’re indicating that there’s an ongoing commitment to move official rates to a neutral range so further rate hikes are in the offing,” said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

The bank cut its forecast for fourth quarter annualized growth to 1.3 percent from the 2.3 percent it predicted in October and pegged first quarter growth at just 0.8 percent. It trimmed the forecast for overall 2019 growth to 1.7 percent, from 2.1 percent.

Investment in the Canadian oil and gas sector would decline by about 12 percent in 2019, compared with the 1.5 percent drop it predicted in October, it said.

The bank said the damage that current low oil prices will inflict on the economy would be about a quarter of that done during a crude slump from 2014 to 2016. Since that time the importance of the energy sector has lessened.

Source :

Reuters

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