The Bank of Canada flirted with the possibility of another interest-rate cut this month in the face of a gloomier forecast for the country's export-led economy.
Governor Stephen Poloz and his top deputies "actively discussed" the merits of what would have been a third cut since the beginning of last year in the lead-up to Wednesday's rate decision, he acknowledged to reporters in Ottawa.
In the end, the central bank opted to leave its benchmark rate at a still-low 0.5 per cent, because of the "significant uncertainties" clouding the bank's economic outlook, including the tumultuous U.S. election and new mortgage insurance rules in Canada.
The central bank said it is closely monitoring the effect of the federal government's move this month to tighten lending standards and limit access to mortgage insurance for riskier borrowers. The new rules should cool resale activity in the housing market and push developers to focus on building smaller units, the bank said.
The housing measures will slice as much as 0.3 per cent a year off economic growth by 2018 as resale activity and home construction take a hit, but they'll also lead to "higher quality" borrowing patterns over the longer term, according to Mr. Poloz.
"While household debt levels have continued to increase, these measures should, over time, help ease the growth of economic vulnerabilities related to household debt and housing," he later told members of the Senate banking, trade and commerce committee.
Earlier Wednesday, Mr. Poloz told reporters he wants to be "dead certain" that the bank's downgraded projection for exports is permanent. He suggested that many businesses in the all-important U.S. market may be holding off on making investments until after the election, and that affects the U.S. appetite for Canadian goods and services.
"It's worth having a little more time to examine some of these things," Mr. Poloz explained.
Not cutting rates was the right thing to do, Toronto-Dominion Bank economist Brian DePratto said.
"An interest rate cut would likely do little to spur exports, while potentially undoing much of the impact of recent housing market rule changes," he argued.
The central bank now expects the economy to grow 1.1 per cent this year and 2 per cent in 2017, down from its July projection of 1.3 per cent and 2.2 per cent respectively, according to its latest monetary policy report, released Wednesday. As well, the bank said the economy won't get back to full capacity until "around mid-2018" – at least half a year later than it predicted just three months ago.
This expected delay suggests it could be another two years before the bank starts trying to push up interest rates – a timetable that now puts it well behind the U.S. Federal Reserve and could keep a lid on the value of the Canadian dollar, now trading at about 76 cents (U.S.) for the foreseeable future.
"This is a bank that has precisely zero appetite for rate hikes, and seems to be keeping a flame alive for the possibility of rate cuts, should the need arise," Bank of Montreal chief economist Douglas Porter said in a research note.
On the positive side, the bank said the worst may be over for the resource sector, where economic activity appears to be "bottoming out." And the bank expects the global economy will "regain momentum" over the next two years.
Still, the bleaker forecast is the latest in a series of disappointments for Mr. Poloz, who has repeatedly predicted that a rebound in non-resource exports would lift the country out of its economic funk. The bank's latest forecast slashes expected export growth by a full percentage-point in 2017 and 2018, shaving roughly 0.5 per cent off economic growth – and some of the loss may be permanent, rather than cyclical, according to Mr. Poloz.
"The level of exports is well below where we thought it would be by now," Mr. Poloz told reporters. He suggested that rising protectionism, the unknown status of various free-trade deals, high electricity costs and poor infrastructure may be inhibiting investment and exports.
Wednesday's report from the bank provides an extensive explanation for why Canada's exports haven't hitched themselves to the recovery in the U.S. – the destination for nearly three-quarters of Canadian goods exports. The main culprits are weaker-than-expected U.S. business investment and more pronounced competitive challenges for Canadian exporters. While a cheaper Canadian dollar has made exports more affordable to foreign buyers, the currencies of major trading rivals have declined even more against the U.S. dollar, giving them an edge in the U.S. market, the bank pointed out in its report. The Mexican peso, for example, has fallen by more than 30 per cent since mid-2014, compared with a 20-per-cent drop for the loonie.
The central bank now expects U.S. business investment to grow just 3 per cent over the next two years, down from a previous estimate of 4 per cent, due to greater uncertainty.