Bank of Canada holds interest rate: Read the official statement

Irving Hamilton
December 8, 2018

The Bank of Canada has chose to keep its benchmark interest rate right where it is while it digests the impact of its previous policy decisions and the cooling economy.

Looking at the positive side, Poloz says the latest oil-price shock also arrives at a time when Canada's economy is running close to full tilt and the unemployment rate is at a 40-year low. These include the effect of higher interest rates on consumption and housing, and global trade policy developments.

Canada's central bank chief indicated during a news conference in Toronto on Thursday that he may not be able to do much to lift markets, which have slumped this week amid concerns that trade tensions between China and the USA are far from resolved.

Weak commodity prices had already been expected dampen investment and exports in the Bank's last communique, but recent moves are seen as making the outlook for the sector "materially weaker". Bloomberg News forecasts that there is a 50% chance of a rate hike in January 2019. The central bank has been gradually raising rates for more than a year, thanks to the stronger economy.

This morning's announcement comes in the wake of a move by the Alberta government to curtail oil production in the province after January 1 to try to clear a crude storage glut that has driven western Canadian oil prices to multi-year lows. Swaps trading suggests the Bank of Canada will cap its hiking cycle at no more than 2.25 percent, below its estimate of a "neutral" range for rates of between 2.5 percent and 3.5 percent.

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The bank raised its key interest rate target at its October meeting - its fifth increase since the summer of 2017.

The bank also said recent data show that the economy has less momentum heading into the final quarter of 2018 related to factors such as a drop in business investment that the bank largely connects to trade uncertainty last summer.

The 2015 oil-price crash contributed at the time to a slight, technical recession and prompted the central bank to cut interest rates to boost Canada's economy - twice. Business investment outside the energy sector is expected to strengthen with the signing of the USMCA, new federal government tax measures, and ongoing capacity constraints.

The bank, which tries to keep inflation within its target band of one to three per cent, noted that October's inflation reading of 2.4 per cent was above its ideal two per cent bull's-eye. Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth.

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