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Interest Rates Hold Steady and Bank of Canada Drops Reference to Future Rate Hikes

Apr 24, 2019

The Conference Board of Canada’s Principal Economist Alicia Macdonald offers the following insights on today's Bank of Canada announcement:

“As expected, the Bank of Canada maintained its overnight rate at 1.75 per cent this morning. The Bank also made a significant downgrade to its economic projection and dropped its reference to future rate hikes, reinforcing our forecast that interest rates will hold steady for the rest of this year.”

Insights

  • The Bank of Canada maintained its target for the overnight rate at 1.75 per cent this morning, a move that was widely expected.
  • The Bank also released an update to its economic forecast, slashing its projection for real GDP growth this year. In January the Bank was calling for the economy to expand by 1.7 per cent but their newest forecast pegs growth at just 1.2 per cent this year.
  • In its statement accompanying the decision, the Bank noted that this downgrade to the economic outlook would result in a modest widening of the output gap.
  • Despite the expectation for a build up of excess capacity (which will weigh on price growth), the Bank still expects inflation to remain around 2 per cent given the recent implementation of carbon pricing in many provinces.
  • The Bank’s economic forecast still calls for growth to pick up in the second half of the year, driven by a stabilization in the housing market, better consumer spending and a bounce back in non-energy investment.
  • Our own forecast is roughly in line with the Bank’s revised projection—we think that the fundamentals are in place to support a rebound in consumer spending after the weak growth we saw at the end of last year. Non-energy investment is also expected to recover from its current low levels although that remains the biggest risk to the forecast given the weak business sentiment expressed in our Index of Business Confidence.
  • Overall, given the economic outlook, the Bank stated that an accommodative interest rate remains appropriate. In its press release, the Bank dropped the reference to future rate hikes and instead noted that they will assess the degree of monetary accommodation required based on incoming data. This supports our view that the Bank of Canada will remain on hold for the rest of this year.

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