The Bank of Canada released a report on Wednesday July 10th, and as expected, it held the interest rate steady at 1.75%. This rate has not changed since October 2018. Highlights of the report include:

  • A slight increase in Canada’s economic growth forecast for 2019 up to 1.3% from the 1.2% forecast in the report released in April.
  • The bank lowered the forecast for 2019 global growth to 3% from 3.2% in the April forecast.
  • Expected growth is forecasted to hit 1.9% in 2020 down from the April forecast of 2.1% in 2020.
  • Expected growth for 2021 is unchanged from the April forecast remaining at 2%.
  • Inflation is expected to be 1.8% in 2019 which is a decreased from April’s forecast of 1.9%.

The report listed several positive signs of broad-based growth in the economy but cautioned that global trade tensions – particularly between China and the United States – are already a drag on growth and could worsen. 

“While recent export data for Canada have been encouraging, the trade environment continues to be the biggest wild card in our outlook,” Carolyn Wilkins, senior deputy governor, said at a press conference in Ottawa. “Governing Council spent considerable time discussing developments on this front,” and determined that “trade conflicts and uncertainty” will reduce the level of gross domestic product by as much as two percentage points by the end of 2021.

Mr. Poloz’s main challenge, according to economists, is to acknowledge the recent strength in the Canadian economy without fuelling a spike in the Canadian dollar just as the global economy is showing signs of weakness.

“Despite the downgrade to the outlook, it’s going to take a deeper deterioration to spark conversations about easing even as the Fed seems poised to lower rates at month’s end,” said Benjamin Reitzes, the director of Canadian rates and the macro strategist for BMO Economics.

The July 10th report said the Canadian economy performed above expectations in the second quarter, after a slowdown in late 2018 and early 2019. The improvement was attributed to temporary factors such as the reversal of weather-related slowdowns earlier in the year and a surge in oil production.

No clear direction was provided regarding the bank’s future policy plans.

“Recent data show the Canadian economy is returning to potential growth. However the growth is clouded by persistent trade tensions,” the bank said. “Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate.”

Source: The Globe & Mail
Source: Financial Post