Bank of Canada policy makers said risks of weak inflation and slower economic growth have increased, a message that contrasts with recent gains in output and exports.
“On balance, risks to the profile for inflation have tilted somewhat to the downside since July,” when the last rate decision was made, policy makers led by Governor Stephen Poloz said in a statement.
That marks a change from the previous statement, in which policy makers said the risks to the inflation profile were “roughly balanced.” Policy makers kept the benchmark rate on overnight loans between commercial banks at 0.5 percent, as anticipated by all 25 economists surveyed by Bloomberg.
Wednesday’s statement downplays two key reports last week that showed the months-long gloom in the Canadian economy may be abating: merchandise exports surged 3.4 percent in July, narrowing a record trade deficit, and gross domestic product rose 0.6 percent in June, topping forecasts.
“We continue to believe the BoC will keep rates on hold for the foreseeable future, but this depends on whether the rebound in exports proves sustainable,” said Charles St-Arnaud, a senior economist at Nomura International Plc in London. “In policy terms, it also means that the likelihood that further easing will be required has increased.”
Canada’s dollar weakened for the first time in five trading days, depreciating 0.3 percent to C$1.2879 per U.S. dollar at 10:14 a.m. Toronto time. Two-year government bond yields fell 3 basis points to 0.54 percent, the lowest since Aug. 12.
Policy makers also signaled growth may not be as robust as previously forecast, saying Wednesday while recent strength in exports was encouraging, “the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July.”
The central bank forecast that month was for the economy to expand at a 3.5 percent annualized pace this quarter, slowing to
2.8 percent in the fourth quarter. Statistics Canada reported last week the economy contracted in the April to June period.
“Today’s statement seemed a bit more dovish than might have been expected,” including “its warnings on risks to the pace of growth and inflation,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto.
Canada has sputtered for most of this year as wildfires hit Alberta oil production and exporters failed to take advantage of rising U.S. demand.
Poloz still must navigate the economy through that weakness while other policy makers grapple with housing booms in Vancouver and Toronto that have led to record consumer debt levels. Economists say those pressures mean Poloz may keep rates on hold into 2018.
Policy makers said Wednesday there will be “a substantial rebound” in the second half of the year and that “the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate.”
Poloz and his deputies also highlighted two reasons the economy may not need fresh monetary stimulus: government child benefit payments which began in July may boost consumer spending, and spending on public works is also starting to take effect.
Cutting interest rates to quicken a recovery would add new risks to the housing boom in Vancouver and Toronto.
“While there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise,” policy makers said.
(Updates with economist comment in fifth, ninth paragraphs.)