Canada’s central bank left its benchmark target for the overnight rate steady at 1.75 percent but turned slightly more dovish as the outlook is clouded by “escalating global trade conflicts and geopolitical tensions” that is weighing on business sentiment despite stronger-than-expected economic growth in the second quarter. The Bank of Canada (BOC), which has kept its key rate steady since October 2018, said the economy, as expected, was returning to its growth potential after temporary weakness in late 2018 and early 2019, and raised its 2019 growth forecast to 1.3 percent from April’s forecast of 1.2 percent as a surge in oil production helped propel growth, consumer spending continues to grow steadily and residential investment appears to have stabilized. But softer foreign demand, lower commodity prices and trade restrictions are leaving their negative impact and BOC lowered its 2020 growth outlook to 1.9 percent from a previous 2.1 percent. The outlook for 2021 was unchanged at 2.0 percent. Canada’s gross domestic product grew 1.3 percent year-on-year in the first quarter of this year, down from 1.6 percent in the previous quarter, but BOC raised its forecast for growth in the second quarter to 1.3 percent from 1.0 percent in its latest monetary policy report. After holding its rate steady at 0.50 percent for two years, BOC in July 2017 began tightening its monetary policy stance and raised its rate five times before pausing in October 2018 as the global economic momentum began to wane. As other major central banks, BOC turned more dovish in the beginning of this year but in May it turned slightly more upbeat as it became clear the slowdown at the end of last year and early this year was temporary and the economy was beginning to rebound. Today’s statement is slightly more downbeat than in May, reflecting an economy that is growing around its potential but uncertainty from trade conflicts and global tensions is taking a toll on business sentiment and clouding the outlook. “Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate,” BOC said, adding it would be paying particular attention to the energy sector and the impact of trade conflicts on the prospects for growth and inflation in incoming data.
Inflation is largely in line with BOC’s target of 2.0 percent and is forecast to ease to 1.8 percent this year, slightly down from 1.9 percent in April’s monetary policy report, before rising to 1.9 percent in 2020 and 2.0 percent in 2021.
In May Canada’s headline inflation rate jumped to 2.4 percent from 2.0 percent on higher transport and food costs.
The Bank of Canada issued the following statement:
“The Bank of Canada today maintained its target for the overnight rate at 1 ¾ percent. The Bank Rate is correspondingly 2 percent and the deposit rate is 1 ½ percent.
Evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook. The Bank had already incorporated such negative effects in previous Monetary Policy Reports (MPR) and in this forecast has made further adjustments in light of weaker sentiment and activity in major economies. Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices.
Policy is responding to the slowdown: central banks in the US and Europe have signalled their readiness to provide more accommodative monetary policy and further policy stimulus has been implemented in China. In this context, global financial conditions have eased substantially. The Bank now expects global GDP to grow by 3 percent in 2019 and to strengthen to around 3 ¼ percent in 2020 and 2021, with the US slowing to a pace near its potential. Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks.
Following temporary weakness in late 2018 and early 2019, Canada’s economy is returning to growth around potential, as expected. Growth in the second quarter appears to be stronger than predicted due to some temporary factors, including the reversal of weather-related slowdowns in the first quarter and a surge in oil production. Consumption is being supported by a healthy labour market. At the national level, the housing market is stabilizing, although there are still significant adjustments underway in some regions. A material decline in longer-term mortgage rates is supporting housing activity. Exports rebounded in the second quarter and will grow moderately as foreign demand continues to expand. However, ongoing trade conflicts and competitiveness challenges are dampening the outlook for trade and investment. The Bank projects real GDP growth to average 1.3 percent in 2019 and about 2 percent in 2020 and 2021.
Inflation remains around the 2 percent target, with some recent upward pressure from higher food and automobile prices. Core measures of inflation are also close to 2 percent. CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors. As slack in the economy is absorbed and these temporary effects wane, inflation is expected to return sustainably to 2 percent by mid-2020.
Recent data show the Canadian economy is returning to potential growth. However, the outlook is clouded by persistent trade tensions. Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate. As Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.”
