The Bank of Canada is keeping its trend-setting interest rate steady at 1.75 per cent in a decision widely expected by economists.
The central bank said Canada’s economy appears to have performed better than predicted in the May to June period, a welcome rebound from temporary weakness at the end of 2018 and in the first three months of 2019. Inflation remains around the bank’s two per cent target, while a healthy labour market is sustaining consumer spending.
The bank also noted that low rates for longer-term mortgages are helping to support activity in the housing market.
However, the bank saio the unexpectedly robust bounce-back in the second quarter was due to temporary factors, such as a recovery from weather-related weaknesses and a boost in oil
It also sounded a note of concern about global trade tensions amid the current tiff between the United States and China. That conflict is “curbing manufacturing activity and business investment and pushing down commodity prices,” the bank said in a statement accompanying its rate decision.
The potential escalation of trade disputes remains “the biggest downside risk to the global and Canadian outlooks,” it added.
Fallout from the uncertain international trade environment was also reflected in the bank’s updated economic projections, which were also released Wednesday in the bank’s quarterly monetary policy report. The bank downgraded its 2019 global growth forecast to three per cent from 3.2 per cent due to trade disputes – the U.S.-China fight, in particular – that have rippled through the world’s economy.
The wider trade-related fights and, in some cases, direct actions are having an impact on Canada. China’s recent trade actions on meat and canola products from Canada are expected to lower exports by 0.2 per cent, the bank said. The changes, including stricter inspections on Canadian goods by Chinese authorities, have come amid a bilateral diplomatic dispute.
Canada’s key interest rate has remained steady at 1.75 per cent since October 2018. The rate affects other interest rates, such as those on variable-rate mortgages and lines of credit.
The bank did not mention whether its next rate move will be a hike, something Bank of Canada governor Stephen Poloz might address in an upcoming press conference following the rate announcement, CIBC chief economist Avery Shenfeld said.
The central bank is also releasing updated projections for Canada that predict annualized economic growth this year of 1.3 per cent, up slightly from its April forecast of 1.2 per cent, and an
expansion of 1.9 per cent in 2020, down from its previous call of 2.1 per cent.
The bank is now projecting second-quarter growth at an annual pace of 2.3 per cent, up from its April call of 1.3 per cent.
— With files from the Canadian Press