The Bank of Canada left its key interest rate unchanged on Wednesday, highlighting the climate of increasing uncertainty surrounding the trade sector.
In explaining the reasons that convinced it to leave the benchmark rate at 1.25%, the central bank noted that recent developments in trade policies had blackened the clouds that are overshadowing the prospects of the Canadian and global economies.
US President Donald Trump recently added tariff threats on steel and aluminum imports to a context already marked by uncertainty in Canada, notably because of the renegotiation of the North American Free Trade Agreement. (NAFTA) and fears of competitiveness since the tax cut for businesses south of the border.
“Developments in trade policy are a significant and growing source of uncertainty for the prospects of the global and Canadian economies,” the bank said in its Wednesday statement.
The Bank of Canada also noted that economic growth in the fourth quarter was weaker than expected, mainly due to higher imports, and that it was still assessing the impact of new policies on real estate markets, including a rules on mortgages.
But she also said that global growth remains “strong and widespread”, that the economy is “close to capacity”, that inflation is close to its target and that wage growth has strengthened. but she remained weaker than she should. In the United States, the Bank of Canada expects new government spending and tax cuts to drive growth in 2018 and 2019.
Uncertainty
Observers generally expected Central Bank Governor Stephen Poloz to keep the key rate at its current level because of weaker economic data recently released and increased uncertainty.
Poloz has raised interest rates three times since last summer, including the most recent increase in January. These decisions were attributable to the strong performance of the Canadian economy since the end of 2016.
Earlier in March, Poloz noted in a speech that central bankers have had to consider a “context of heightened uncertainty”.
“Uncertainty has been a focus of our thinking since the global financial crisis has exposed the limits of our models and our knowledge,” Poloz said in a speech delivered in London, where he accepted the price of Central Bank of the Year on behalf of the Bank of Canada.
“Because deep uncertainties are everywhere, we began to present the formulation of monetary policy not as precision mechanics, as some might think, but as a risk management approach. ”
The next step on April 18th
In its statement on Wednesday, the central bank reiterated that further interest rate hikes would eventually be required, but that its board of directors would remain cautious in its future decisions.
The board will continue to draw on new economic data to gauge the sensitivity of the economy to interest rates, changing economic capabilities and the dynamics of wage growth and inflation, the bank said.
In its study of Canadian housing data, the bank indicated that the recovery in late 2017 had been followed by weaker results since the beginning of the year. This suggests that there has been “some advance in demand before the new Mortgage Guidelines and other policy measures come into force,” the institution said.
The next central bank announcement on the key rate is scheduled for April 18. It will also publish an update of its economic forecasts.
The bank said the impact of last month’s federal budget commitments on inflation and growth would be incorporated into its April forecast.
