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Bank of Canada keeps rate hike options open

Bank of Canada Governor Stephen Poloz speaks a news conference after the release of the Financial System Review in Ottawa on Nov. 28, 2017. The central bank released its latest decision on interest rates on Wednesday.


Stephen Poloz is no closer to pulling the trigger on another interest-rate hike in spite of a run of good economic news.

The Bank of Canada Governor underscored the cautious tone as he kept the central bank's benchmark overnight rate at 1 per cent on Wednesday – its final rate decision of 2017. And he offered no clear indication about when the bank might hike again.

The Bank of Canada has already raised interest rates twice this year – in July and September – as it works to gradually return rates to more normal levels.

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"While higher interest rates will likely be required over time, [the bank] will continue to be cautious, guided by incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation," the bank said in a statement accompanying its rate decision. That sentence repeats nearly word for word the language of its statement in October, when the bank also left rates unchanged.

Investors had been looking for a hint from the central bank that another hike might be coming as early as January after a string of surprisingly good economic reports – on jobs, growth and exports. They didn't get it, and the Canadian dollar promptly lost nearly a full cent on Wednesday to 78.39 cents (U.S.).

There is still a lot of disagreement among economists about how far and how fast the Bank of Canada will raise its key rate, which remains roughly two-percentage-points below what the bank regards as "neutral."

Mr. Poloz is choosing to keep his options open even though economic conditions are ripe for higher rates, Toronto-Dominion Bank economist Brian DePratto said.

"Despite things seeming to line up for further near-term tightening, Governor Poloz has chosen to maintain his optionality," Mr. DePratto explained in a research note. "Things continue to point to a hike sooner rather than later. However, as [Wednesday's] statement shows, nothing is a done deal until the day of the decision."

Royal Bank of Canada expects the central bank to stay in a holding pattern on rates until next April.

"That will give them some time to evaluate the impact of this summer's two rate hikes," RBC economist Josh Nye said. "They'll also, hopefully, have a better idea of how one of the most significant risks facing the economy, the NAFTA renegotiation, is evolving."

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Among the things possibly holding Mr. Poloz back is potential failure of talks with the United States to renegotiate the North American free-trade agreement. The threat of NAFTA's demise has put a chill on business investment in Canada, particularly in the manufacturing sector.

The bank's statement mentions only that the global outlook is still facing "considerable uncertainty" related to "geopolitical developments and trade policies."

Elsewhere, a lot is going right for the Canadian economy. The jobless rate is at a 40-year low, employers are adding jobs at a healthy pace and even wages have started to creep up. The economy is on track to grow at a roughly 3-per-cent clip this year. And oil prices have been steadily climbing since the spring.

Indeed, much of the Bank of Canada's statement highlighted positives for the economy, including "above potential" second-half GDP growth, "very strong" job gains, "robust" consumer spending and October's resumption in export growth.

Even inflation, which has remained stubbornly below the central bank's 2-per-cent target for years, is showing signs of life amid "diminishing" labour-market slack, according to the statement.

"Inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gasoline prices," the bank said.

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Another outlier in the otherwise bullish outlook is the slowing housing market. But a cool down of the hottest housing markets in Toronto and Vancouver is exactly what the central bank wants in the face of record household debt. Canadians owe $1.68 (Canadian) for every dollar of disposable income.

Many economists expect the Bank of Canada to resume hiking interest rates in 2018, but investors now judge there is just a 1-in-3 chance that it will move at the next rate announcement on Jan. 17.

Mr. Poloz will have one more opportunity to alter the central bank's messaging next Thursday in Toronto, when he is scheduled to speak to the Canadian Club.

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