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Report on Business Bank of Canada leaves rates on hold amid global trade tensions

The Bank of Canada kept its key interest rate unchanged Wednesday and avoided signalling its plans, even as its U.S. counterpart set the stage for a rate cut as soon as this month.

Carolyn Wilkins, the Bank of Canada’s senior deputy governor, said Canada and the United States are taking different approaches because they are in different stages of the economic cycle.

“The fact that Canada is picking up while the U.S. economy is slowing sounds like a divergence. In fact, it’s a process of convergence,” she told reporters after the central bank released its latest interest rate decision, as well as a quarterly monetary policy report. “The United States is slowing to a more sustainable pace, while Canada is moving back up to its trend growth.”

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The overnight rate remains at 1.75 per cent, where it has stayed since the bank announced an interest rate increase in October, 2018. The decision was in line with economists’ expectations.

The bank’s report included a slight increase in Canada’s economic growth forecast for 2019 – 1.3 per cent, up from the 1.2 per cent it forecast in its April report – while projecting somewhat slower growth next year.

The report listed several positive signs of broad-based growth in the economy but cautioned that global trade tensions – particularly between China and the United States – are already a drag on growth and could worsen. The bank lowered its forecast for 2019 global growth to 3 per cent, down from its April forecast of 3.2 per cent.

“While recent export data for Canada have been encouraging, the trade environment continues to be the biggest wild card in our outlook,” said Ms. Wilkins, who spoke with reporters alongside Governor Stephen Poloz.

The report came on the same day that U.S. Federal Reserve chairman Jerome Powell told a congressional committee that he would “act as appropriate” to protect the U.S. economy from the disappointing performance of the global economy. The comments raised expectations that the Fed could cut rates this month.

Mr. Poloz’s main challenge, according to economists, is to acknowledge the recent strength in the Canadian economy without fuelling a spike in the Canadian dollar just as the global economy is showing signs of weakness.

RBC senior economist Josh Nye said Wednesday's policy statement was more dovish than expected.

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While the bank did not appear to be moving toward a clear bias in favour of easing interest rates, he said in a note, markets seem justified in thinking the bank’s next move will more likely be down than up.

Other economists said they are not expecting any near-term rate cuts in Canada based on Wednesday’s report.

“Despite the downgrade to the outlook, it’s going to take a deeper deterioration to spark conversations about easing even as the Fed seems poised to lower rates at month’s end,” said Benjamin Reitzes, the director of Canadian rates and the macro strategist for BMO Economics.

Wednesday’s report said the Canadian economy performed above expectations in the second quarter, after a slowdown in late 2018 and early 2019. The improvement was attributed to temporary factors such as the reversal of weather-related slowdowns earlier in the year and a surge in oil production.

The bank lowered its forecast for 2019 global growth Wednesday to 3 per cent, down from its April forecast of 3.2 per cent.

No clear direction was provided regarding the bank’s future policy plans.

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“Recent data show the Canadian economy is returning to potential growth. However the growth is clouded by persistent trade tensions,” the bank said. “Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate.”

The bank projects growth will hit 1.9 per cent in 2020 – down from its April forecast of 2.1 per cent – and 2 per cent in 2021, which is unchanged from the April forecast.

Inflation is expected to remain close to 2 per cent throughout the forecast period, right in the middle of the bank’s target range of 1 per cent to 3 per cent. Wednesday’s report projects inflation of 1.8 per cent in 2019, down from the April forecast of 1.9 per cent, and is expected to come in at 1.9 per cent next year and 2 per cent in 2021.

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