Timing of Future Canadian Central Bank Rate Increases Has Become Less Certain

March 6, 2019

The Bank of Canada’s second policy review of 2019 left the overnight interest rate target unchanged at 1.75% but made important changes in the economic outlook and future policy guidance.

When the Governing Council last met eight weeks ago, it concluded that “the policy rate will need to rise over time into a neutral range to achieve the inflation rate.” The bolded words had been added to the forward guidance from a statement released at the final review of 2018. The implied lessening urgency to act sooner rather than later was consistent at the time because of a temporary slowdown of growth in late 2018 and projected for early 2019.

A new statement released today, however, observes that the slowdown late last year turned out to be “sharper and more broadly based” and concedes that “it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.” In light of this shift, moreover, projected CPI inflation through most of 2019 is expected to run “slightly below the 2.0% target.”

The statement’s final paragraph in which forward policy guidelines are communicated stops short of the example of Australia’s central bank, which has begun suggesting the next rate change could be a cut rather than an increase. Upward rate bias at the Bank of Canada has been maintained. There’s no hint in the statement whatsoever of a possible cut, which would constitute a policy reversal. There have already been five increases of 25 basis points, implemented respectively in July and September of 2017 and then January, July and October of last year.

While recently previous policy reviews had maintained the intention of returning the central bank rate target to a “neutral range” (i.e. levels that neither boost nor restrain aggregate demand), the new forward guidance “judges that the outlook continues to warrant a policy interest rate that is below its neutral range” and then inserts ambiguity regarding any future normalization and even whether the rate ultimately climbs to a neutral level.

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.

Today’s statement makes no reference to the Canadian dollar per se but includes a few sentences that not subtly lay blame for the global slowdown at U.S. President Trump’s feet, whose elevation of the U.S. trade balance to a top policy priority led to threatened and actual tit-for-tat tariff hikes.

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. 

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



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