On September 4th the Bank of Canada announced that it would hold its key interest rate. However, with escalating trade wars, experts anticipate the rate will be lowered in the near future.

The Bank of Canada kept its key interest rate unchanged at 1.75% on September 4th, but said the U.S.-China trade conflict is having a more damaging impact on global growth than previously thought.

Heading into the rate announcement, the bank was expected to keep rates unchanged this month. However, some economists were predicting a rate cut as soon as the bank’s next decision, in late October. The Canadian dollar climbed after the statement’s release, as the bank’s tone dampened market expectations that a rate cut is on the horizon.

“As the U.S.-China conflict has escalated, world trade has contracted and business investment has weakened,” the bank stated September 4th in a news release. “This is weighing more heavily on global economic momentum than the bank had projected in [July].”

Bank of Canada Governor Stephen Poloz and his council of advisers must weigh the relatively positive domestic trends in terms of growth and stable inflation with the rising threats to the world economy, including the looming Brexit deadline.

Domestically, the bank noted that Canada’s second-quarter growth was strong and exceeded the bank’s most recent forecast. Wednesday’s release pointed to stronger energy production and housing activity as contributing factors. It also said higher wages have contributed to labour income growth.

The bank expects economic activity to slow in the second half of the year.

“Canada’s economy is operating close to potential and inflation is on target,” the bank said. “However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies. In this context, the current degree of monetary policy stimulus remains appropriate. As the bank works to update its projection in light of incoming data, Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation.”

The United States and China are Canada’s two largest trading partners. The economic giants are in the midst of an escalating trade war in which both sides are slapping tariffs on imports as they grapple over a new long-term trading arrangement.

The bank’s statement highlighted the fact that economic uncertainty has caused several central banks to cut rates this year, including the U.S. Federal Reserve. In July, the U.S. lowered its core lending rate to 2.25%.

CIBC chief economist Avery Shenfeld said the bank’s statement was “not quite as dovish” as the market was expecting.

“We do think the Bank of Canada will ultimately have to ease, but perhaps December is looking more likely than October for that decision,” he said in a note to clients.

RBC Economics Research senior economist Josh Nye also said the bank’s statement could dampen expectations that a rate cut is imminent.

“Since its July meeting, conversation has shifted from ‘if’ to ‘when’ the BoC will join its many global peers in lowering interest rates. But that evolution wasn’t obvious in [September 4th’s] policy statement, which was more neutral than expected,” he said in a note. “The bank’s comments on the global outlook suggest the door is open to a rate cut. Our forecast assumes a move in January.”

At the bank’s rate announcement in July, senior deputy governor Carolyn Wilkins said that while the U.S. and Canadian economic trends may appear to be diverging, the reality is that the two economies are converging toward sustainable levels.

The C.D. Howe Institute’s Monetary Policy Council – a group of financial sector and university economists – issued a report a week before the statement recommending that the bank hold its key rate at 1.75% this month, but called for a rate of 1.25% by March, 2020.​

Source:  Globe and Mail