The Bank of Canada announced Wednesday it has maintained its target for the overnight rate at 1.75 per cent. The bank rate is two per cent and the deposit rate is 1.5 per cent.
It forecasts real GDP in Canada will grow by 1.6 per cent this year and two per cent in 2021, following 1.6 per cent growth in 2019.
“The global economy is showing signs of stabilization, and some recent trade developments have been positive,” the bank stated. “However, there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences. The Canadian economy has been resilient but indicators since the October Monetary Policy Report (MPR) have been mixed.”
The bank forecast that growth in the near term will be weaker, and the output gap wider, than the bank projected in October.
“The bank now estimates growth of 0.3 per cent in the fourth quarter of 2019 and 1.3 per cent in the first quarter of 2020. Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter. Job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft.
“In contrast, residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter. Some of the slowdown in growth in late 2019 was related to special factors that include strikes, poor weather, and inventory adjustments. The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted. Moreover, during the past year Canadians have been saving a larger share of their incomes, which could signal increased consumer caution. This could dampen consumer spending but help to alleviate financial vulnerabilities at the same time.”
The Bank said Canadian business investment and exports are expected to contribute modestly to growth, supported by stronger global activity and demand. The Bank is also projecting a pickup in household spending, supported by population and income growth, as well as by the recent federal income tax cut.
In its daily economic update The Owl, ATB Financial’s Economics & Research Team said the bank continues to buck the international trend toward reducing borrowing costs in an effort to stimulate economic growth.
It said the bank’s announcement “acknowledges recent struggles within the Canadian economy, but argues ‘some of the slowdown in growth in late 2019 was related to special factors that include strikes, poor weather, and inventory adjustments’ that won’t be in play going forward. As a result, the Bank is maintaining its “wait and see” approach before pulling the trigger on a rate cut.”
“Inflation remains within the Bank’s target range of two per cent, further cementing the Bank’s decision to hold pat on rates for now,” said ATB.
“The last time the Bank changed the rate was in October of 2018 when it was increased from 1.5 to 1.75. The next scheduled rate announcement is set for March 4, 2020.”
Mario Toneguzzi is a business reporter in Calgary.
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