BoC: Poloz holds as uncertainty remains unabated – TD Economics

Surprising no-one, Governor Poloz once again held the tiller steady, leaving the Bank of Canada's key policy interest rate unchanged at 0.50% notes Brian DePratto, Senior Economist at TD Economics. 

Key Quotes

“According to the Bank of Canada's latest projections Canadian GDP is now estimated to have expanded by 1.3% in 2016 (previously: 1.1%), and is expected to accelerate to 2.1% this year (was 2.0%). The Bank's projection of 2.1% growth in 2018 was left unchanged.”

“The Bank remains concerned by global uncertainty, which it views as 'undiminished' – particularly as it relates to the United States, where the Bank has incorporated some preliminary assumptions around tax policies that it views will lead to slightly higher pace of U.S. economic growth. The statement that accompanied the rate decision continued to focus on the differences between the U.S. and Canada. Both the high level of slack in the Canadian economy and recent strength of the loonie were flagged as causes for concern.” 

“The Bank does not appear overly concerned about the currently slow pace of inflation (CPI-common: 1.3% year-on-year in November). Rising energy prices and the dissipation of food price impacts are expected to bring inflation close to the 2% target 'in the months ahead.'”

“The Monetary Policy Report re-evaluated the risks to the outlook. Stronger U.S. growth and higher commodity prices remained as the upside risks. On the downside, weak household spending and slow Canadian business investment were joined by two new risks: a shift towards protectionist global trade policies, and higher global long-term interest rates.”

“Key Implications

• Beneath a 'steady as she goes' decision lies a great deal of concern for the Bank of Canada. First and foremost is the possibility of protectionist measures that would have a 'material' negative impact on Canada, although such measures have not been incorporated into the Bank's projections at this point. Also flagged for concern was the strength of the Canadian dollar, which is making ongoing competitiveness challenges worse. Finally, although the resource sector is seen as having largely adjusted to past commodity price movements, the aftershocks are seen as still reverberating in the Canadian economy.  
• On balance, caution is once again the key to the Bank of Canada's thinking. Heightened uncertainty and the remaining economic slack both point to a Bank that is likely to maintain its policy rate at 0.50% for some time to come. As has been the case for some time, we view the risks around this outlook as tilted towards a cut. The expected contribution from stimulative Canadian fiscal policy seems high, particularly in light of the delays that have been observed in translating federal spending pledges into economic activity on the ground. A further uptick in global yields that impacts Canada would not be welcome and may necessitate a reaction. Moreover, protectionist sentiment, even in the absence of actual measures, is likely to weigh on both exports and investment.”