Bank of Canada Sees Enough Resilience to 'Chart its Own Course'

Daniel Fowler
December 5, 2019

Mr. Lane argued that despite the Canadian economy's close ties to the US, it often doesn't make sense for the Bank of Canada to match Fed rate moves - something that some critics have argued the Bank of Canada should be doing, to avoid too much divergence in the two countries' interest rates.

"Barring some disruption on the trade policy front, it looks like the Bank of Canada is content to remain on the sidelines for a lot longer", he said in a phone interview.

"In part, this is because inflation and [the Bank of Canada's economic] outlook remain on target, and also because our policy rate was lower to begin with", he said.

The speech is in line with an upbeat tone in the rate statement Wednesday that indicated the Bank of Canada is comfortable in its current wait-and-see stance, driving a 0.7% gain in the Canadian dollar on the day.

Lane cited recent third-quarter economic data that while confirming a slowdown, also seem to show the weakening will be temporary.

Reitzes added that barring a negative shock hitting the economy, the Bank of Canada could be on hold for some time yet.

While others around the world, including the US Federal Reserve, have cut rates in recent months in an attempt to stimulate their economies and head off a global downturn, the Bank of Canada's main lending rate has stood at 1.75 percent since October 2018.

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Sal Guatieri, senior economist with BMO Capital Markets, said the bank appeared to be taking comfort from the rebound in business investment and steady growth in consumer spending. "Financial markets have been supported by central bank actions and waning recession concerns, while being buffeted by news on the trade front", the Bank noted in its announcement. In contrast, the USA economy continued to improve.

Meanwhile, economic growth in Canada slowed in the third quarter to an annual pace of 1.3 per cent, matching the forecast by the Bank of Canada in its monetary policy report in October, while inflation has remained close to the central bank's target of two per cent.

The Bank of Canada held steady in its last meeting, too, the same day that the US Federal reserve made a decision to cut rates by 25 basis points.

Policymakers said they continue to "monitor the evolution of financial vulnerabilities related to the household sector", which is how the Bank of Canada expresses its concern about elevated levels of household debt.

"We were expecting investment to decline in the second half of this year, but instead we have seen solid growth".

The Bank of Canada's next interest rate decision is set for January 22, when it will also update its outlook for the economy and inflation as part of its quarterly monetary policy report. In September, the market was bracing for as many as three rate cuts.

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