Bank of Canada’s Overnight Interest Rate Target Left at 1.75%

October 30, 2019

The 1.75% overnight central bank interest rate in Canada constitutes a post-Great Recession high and has been at that level since an increase in October 2018. Officials consider that rate level still appropriate and noted today a number of resilient elements in Canada’s economy related to the labor market, household income trends, and housing. But the take-away from today’s rate announcement and accompanying quarterly Monetary Policy Report  is an increase in the Governing Council’s caution:

  • Projected global growth in 2019 and 2020 was lowered.
  • Projected Canadian GDP growth in 2020 and 2021 was reduced 0.2 percentage points each to 1.7% and 1.8%. Such follows 1.5% expected this year.
  • Policymakers assert that the global economic outlook is weaker than such appeared three months ago and concede that “growth in Canada is expected to slow in the second half of this year to a rate below its potential” and recognize that “the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist. “
  • Some modest excess productive capacity currently exists, but with actual growth near potential growth, CPI inflation is expected to hover near its 2% target.

Two of the three 25-basis point central bank interest rate hikes from 2010 were reversed in 2015. The second attempt to normalize the policy rate started with a 25-basis point increase in July 2017 and was followed by four more in 2018. At 1.75%, the rate for the past year remains about a percentage point below what the Governing Council considers long run equilibrium. Nonetheless, policymakers in the past year have managed to avoid rate declines. This isn’t true of many other central banks. Consider the last week, for example. The Fed will likely cut today for the third time since end-July. The Swedish Riksbank maintained a negative interest rate benchmark of -0.25%. Chile’s monetary policy rate was lowered 25 basis points on top of reductions of 50 bps in both September and June. Bank Indonesia’s 7-day reverse repo rate was cut 25 basis points to a 16-month low of 5.0%. Turkish monetary officials did a much greater-than-expected 250-basis point cut of its one-week repo rate. Russian monetary officials cut their interest rate by 50 basis points and said more relief will follow assuming economic trends align with their baseline forecast, and the ECB deposit rate was left at -0.5% after the final meeting chaired by outgoing President Draghi.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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