Bank of Canada holds rates steady, sees signs of stabilizing global economy

The Bank of Canada kept its key interest rate unchanged in its final rate decision of 2019, citing signs of a stabilizing global economy and the “resilience” of Canada’s consumers.

In a five-paragraph statement Wednesday, the central bank announced that it maintained the target for the overnight rate at 1.75 per cent, where it has stood since October, 2018. The bank continues to hold rates steady despite a wave of cuts at other central banks around the world, designed to combat slowing growth and deep uncertainty surrounding the U.S.-China trade war.

The central bank said that Canada’s inflation rate continues to hold near the bank’s 2-per-cent target, “consistent with an economy operating near capacity” – the two key elements for the bank that continue to argue against a rate cut.

Meanwhile, the bank indicated that the rate cuts in recent months by other central banks, including the U.S. Federal Reserve, have provided important support for the global economy and financial markets, easing fears of a deeper global downturn.

“There is nascient evidence that the global economy is stabilizing,” the bank said. “Financial markets have been supported by central bank actions and waning recession concerns.”

However, it cautioned that “ongoing trade conflicts and related uncertainty are still weighing on global economic activity, and remain the biggest source of risk to the outlook.

Economists said the bank’s overall tone was more optimistic than it was in its previous rate announcement and economic outlook in October – when it warned about the dangers of contagion from global trade woes, and acknowledged that it had considered a rate cut as “insurance” against a worsening downturn.

Still, the door remains open a crack for a rate cut next year, as the bank continues to weigh the downside risks of the U.S.-China trade dispute, and its impact on a Canadian economy that so far held up reasonably well to the global pressures.

“Future interest rate decisions will be guided by the bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy – notably consumer spending and housing activity,” it said.

“While the risks to the outlook for the BoC remain skewed toward a cut, it doesn't look like policymakers are in any hurry to move at this point,” Bank of Montreal chief economist Douglas Porter said in a research note.

The Bank of Canada noted that last week’s third-quarter gross domestic product report, which pegged growth at a modest 1.3-per-cent annualized rate, showed strength in consumer spending, wage growth and housing investment.

But it said it remains concerned about the high household debts that have contributed to that strength. Those have been fed by low borrowing rates, the result of a slump in global bond yields over the summer amid escalating China-U.S. trade hostilities.

“The bank continues to monitor the evolution of financial vulnerabilities related to the household sector,” it said.

The bank also took note of the third quarter’s “unexpectedly” strong growth in business investment, which bucked the global trend slumping investment in the face of trade worries. However, it remained cautious, indicating that it needs to see more evidence that business investment has turned the corner.

The bank also said that commodity prices and the Canadian dollar “have remained relatively stable” since its October rate decision, following a combination of commodity declines and a rising currency that had weighed on the Canadian economy.

The Bank of Canada will provide further details about its views on the Canadian economy on Thursday, when deputy governor Timothy Lane gives a speech in Ottawa updating the bank’s economic outlook. The speech won’t contain new growth forecasts, which the bank provides quarterly, most recently in its October Monetary Policy Report. But it will shed more light on any changes to the central bank’s views since October.

In that October report, the bank forecast that the Canadian economy would grow at a 1.3-per-cent annualized pace in both the third and fourth quarters, before accelerating to 1.7 per cent in 2020.

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