Written By: Adrian Moore – Forex Focus
Canada’s central bank holds key interest rates at 1.0 percent, citing global uncertainty.
The Bank of Canada (BoC) in its final monetary-policy committee (MPC) meeting for the year left benchmark interest rates on hold at 1.0 percent and the bank rate at 1.25 percent after raising them for the first time in seven years by 25 basis points in July and September respectively. The benchmark, or the overnight rate, is the rate at which major financial institutions in Canada transact among themselves by lending and borrowing funds overnight. These rates broadly influence other interest rates in the country, such as mortgage and consumer loans, in addition to defining the exchange rate of the Canadian dollar.
In the press release following the monetary-policy meeting, the BoC stated that the global economy is expanding in line with its monetary-policy outlook from October, led by the United States, which broadly reported strong growth numbers in the third quarter of this year.
For the Canadian economy, the central bank expects growth to moderate, although it remains above potential in the second half of the year, backed by strong employment numbers and moderate improvement in wages, which were the key elements lending support to consumer spending. In addition, business investment and spending on public infrastructure continued to expand into the second half of the year after a strong show in the first half of 2017, while the housing industry looked to expand moderately. Exports, on the other hand, which declined more than expected in the third quarter following solid growth in the first half of the year, are expected to pick up steam on the back of a rise in global demand. Consumer inflation in Canada, which has outpaced the central bank’s expectations in recent months, is expected to advance further at least in the short-term; the recent conflicts in the Middle East could raise the level of political instability in the region, driving up international crude-oil prices, thereby driving the price of gasoline domestically. The bank remained extremely cautious as the global outlook poses a number of challenges, especially on the geopolitical front and with international trade policies, although there were no direct references to either the standoff on the North American Free Trade Agreement (NAFTA) or the Brexit negotiations that are currently underway.
The Canadian dollar headed lower versus the greenback following the interest-rate announcement before settling at 1.2788, down about 0.80 percent from the previous session’s close. For the year, the loonie is up close to 4 percent and is mostly unchanged month-on-month. The Canadian dollar also slipped against the other majors, with the currency down 0.27 percent versus the Aussie, more than half a percent lower against the euro and around 0.4 percent weaker versus the pound sterling.
The S&P/TSX Composite Index, the country’s largest stock index, meanwhile, slid into negative territory briefly on the back of falling crude-oil prices and the outcome of the monetary-policy meeting before rebounding to end the day nearly unchanged at 15908.78, led by gains in financial stocks. The index, which until mid-September was among the worst performing benchmarks in the developed world, gathered momentum to hit all-time highs in November following a rebound in energy stocks on the back of a rally in global crude-oil prices. The TSX is currently down close to 1.5 percent from its record highs.
A majority of analysts surveyed prior to the MPC meeting expected the central bank to maintain its monetary-policy stance during the December meeting, although there are mixed views on when the BoC will actually begin its next interest-rate hiking cycle and the number of hikes next year. While most analysts agree that the bank may tighten twice next year, they do not see any changes in the rates at least until the start of the second quarter. With crude-oil prices backing off from its recent highs and consumer inflation averaging 1.4 percent for the year in third-quarter 2017, the near-term outlook of an interest-rate hike looks extremely bleak.
The central bank will also be keenly watching the progress on the North American Free Trade Agreement (NAFTA), which includes the United States and Mexico, and is considered the world’s largest free-trade agreement. In addition, the bank is also expected to monitor some of the key economic indicators in the fourth quarter, especially the ones related to employment, wage growth and consumer inflation. The dovish monetary-policy statement from the Bank of Canada subjecting further interest-rate increases to rises in wage growth and inflation only adds to the growing chorus that current rates are here to stay, in spite of the Canadian economy outpacing the other G7 countries in 2017. Governor Stephen Poloz, speaking at the Canadian Club of Toronto on December 14, is expected to highlight some of the risks posed to the Canadian economy.
The Bank of Canada is expected to publish its business outlook survey on January 8 before its next monetary-policy meeting scheduled for January 17, 2018.