Uncertainty over U.S. trade policies is holding back Canadian business investment despite strong economic fundamentals, helping temporarily slow growth, a deputy governor of the Bank of Canada said on Wednesday.
Timothy Lane also pointed to lower oil prices and a softening housing market as factors hindering growth, in contrast to the U.S. economy, which is powering ahead on the effects of stimulus.
“The past year has seen an important change in the relative performance of the two economies, despite the fact that the Canadian economy is generally in a good place,” Mr. Lane said in a speech on foreign-reserves management to a gathering of economists in Washington.
He noted the Bank had raised interest rates by a cumulative 1.25 percentage points since July, 2017, but did not address whether further hikes would be needed. The central bank stayed on the sidelines on Jan. 9 and market traders expect it to hold rates steady once again on March 6.
Mr. Lane said the lower business investment, falling oil prices and softer housing market, coupled with U.S. interest rate hikes, were putting downward pressure on the Canadian dollar. This would help support the economy through the period of slower growth, he said.
Mr. Lane noted the Canadian economy had been running at close to potential for two years, growth was solid and unemployment rates are at historic lows.
“But uncertainty about U.S. trade policies has been holding back Canadian business investment below what our strong economic fundamentals would indicate,” he said.
Bank of Canada Governor Stephen Poloz said on Jan. 23 the economy was in good shape and reiterated that the pace of future interest-rate hikes would be heavily dependent on data.
Mr. Lane also highlighted a relatively recent move by other countries to add Canadian dollars to their foreign-reserve portfolios, with reserves in Canadian dollars now amounting around $200-billion, or close to 2 per cent of the global total.
He said that while this move was a “vote of confidence in Canada,” inflows from reserve managers may put downward pressure of yields, lowering the Canadian government’s funding costs, and might negatively affect the market’s liquidity.