Bank of Canada Leaves Key Rate Unchanged as Economy Steadies

The Bank of Canada kept its key interest rate unchanged, saying benchmark crude oil prices and inflation are close to policy makers’ assumptions and a weaker currency will boost non-energy exports.

In a decision Wednesday the central bank held its benchmark rate on overnight loans between commercial banks at 0.75 percent, as forecast by a majority of economists in a Bloomberg News survey. Two-year yields rose the most in five years and the currency reversed losses.

Bank of Canada Governor Stephen Poloz said last week his surprise Jan. 21 interest rate cut bought policy makers time to study how the oil price crash plays out in the economy. The cut led to a “material easing” in financial conditions that will mitigate the negative effects of the oil price shock, the bank said from Ottawa.

“This statement seems to suggest they are done for now,” Randy LeClair, senior money manager at Manulife Asset Management, said in a telephone interview from Toronto. The lesson for investors from January is that “when you see large movements in commodities, there is going be a policy response.”

The Group of Seven’s biggest crude exporter is awaiting the full impact from last year’s drop in oil prices, with the central bank predicting in January growth will slow to 1.5 percent in the first half while inflation may briefly turn negative. Those forecasts assumed Brent crude would trade at $60 a barrel.

Brent fell 1.5 percent to $60.06 a barrel Wednesday on the London-based ICE Futures Europe exchange.

‘More Balanced’

Easier financial conditions across the yield curve and including a weaker Canadian dollar will spur non-energy exports and investment, the bank said today.

“The risks around the inflation profile are now more balanced,” policy makers led by Poloz, 59, said in the statement, adding the current degree of stimulus “is still appropriate.”

Eighteen of 23 economists in a Bloomberg News survey expected no change today. Five predicted cuts, including Avery Shenfeld, chief economist at CIBC World Markets, who abandoned that call after the decision.

“We’re no longer looking for another rate cut,” Shenfeld wrote in a note to clients, saying Poloz might be willing to accept short-term disappointment in his growth forecast. By the time growth begins to weaken, the Federal Reserve will probably in the process of raising rates, lifting Canadian longer-term yields, Shenfeld said.


Two-year government bond yields rose the most since October 2009 after the decision, climbing 12 basis points to 0.62 percent. The Canadian dollar, down 7 percent this year through yesterday, appreciated as investors trimmed bets the central bank would cut rates in April.

Most of the negative impact from lower oil prices will appear in the first half of 2015, although it may be even more “front-loaded” than anticipated in January, the bank said.

“We wouldn’t yet rule out a rate cut,” said Mazen Issa, senior Canada macro strategist at TD Securities. “By April we will have much more information” about the damage from lower oil prices.

Trading in overnight index swaps suggests the chances of another rate reduction at the April 15 meeting are about 22 percent, down from more than 50 percent yesterday.

Dollar Reaction

Canada’s dollar reversed losses on the decision, appreciating 0.5 percent to C$1.2428 against the U.S. dollar at 11:31 a.m. in Toronto. The currency is down 6.5 percent this year against the greenback.

Today’s decision was “pretty straightforward” after the January surprise and suggests the next move depends on the progress of economic growth, inflation and oil prices, said LeClair, who helps oversee C$17 billion of assets.

Canada in January became the first Group of Seven nation to cut interest rates in response to the oil shock it said would weigh on everything from inflation to exports and home prices in Alberta. That move was predicted by none of the 22 economists surveyed by Bloomberg.

Inflation has “fallen as expected,” the Bank of Canada said today and fourth-quarter growth was “consistent” with its forecast. Canada’s economy grew at 2.4 percent annualized pace in the fourth quarter, Statistics Canada said Tuesday, close to the central bank’s 2.5 percent estimate.

The Bank of Canada will wait beyond April to decide if the economy needs another rate move in response to the oil shock, said Derek Holt, Scotiabank’s vice-president of economics. He cited today’s statement and Poloz’s comment in a speech last week saying he could wait to see the impact.

“They bought a lot of time,” Holt said by telephone from Toronto. “They aren’t going to do anything until the third quarter at the earliest.”

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