Photographer: Patrick Doyle/Bloomberg

Bank of Canada Flags Trade Policy Risks in Holding Rates Steady

Updated on
  • Recent trade developments are source of uncertainty to outlook
  • Central bank says it will take time to assess housing trends

The Bank of Canada kept borrowing costs on hold Wednesday and indicated it’s in no rush to pursue aggressive interest rate hikes amid growing global trade tensions and softer housing data.

The statement, which left the benchmark rate at 1.25 percent, repeated dovish language about moving cautiously in an economy that will require continued stimulus. The broader trade comment was new, though policy makers made no explicit mention of U.S. President Donald Trump’s threats to impose tariffs on steel and aluminum.

While global growth is “solid and broad-based,” recent developments in trade policy have become “an important and growing source of uncertainty” for the Canadian economic outlook, the central bank said.

Investors have pared bets on rate hikes after a run of soft economic data, turmoil in global equity markets and growing geopolitical concerns. That may increase Bank of Canada Governor Stephen Poloz’s caution about any decision to tighten monetary policy further. While the Bank of Canada has been highlighting risks to the North American Free Trade Agreement for months, the latest language suggests those concerns have evolved.

Wednesday’s statement didn’t mention Nafta.

Paring Bets

Traders aren’t fully pricing in the next rate increase -- which would be the fourth in the cycle -- until July, according to Bloomberg calculations on overnight index swaps. A month ago, traders were pricing in at least one increase by May, with a good chance of an April hike. The market expects two to three more hikes later this year, with the odds of two being higher.

The Canadian dollar traded 0.7 percent weaker at C$1.2963 against the U.S. dollar at 10:42 a.m. Toronto time, down 2.9 percent this year, the worst performing currency among 16 majors tracked by Bloomberg.

Rates fell slightly across the curve, with the yield on the country’s two-year bonds down two basis points to 1.75 percent to match a seven-week low reached earlier this week. The yield on 10-year debt was down three basis points to 2.21 percent.

The statement was “modestly dovish” for flagging trade policy developments, John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said in an inteview.

By the central bank’s own measure, interest rates are still about 2 percentage points below what it would consider “neutral” and the central bank did repeat it expects borrowing csots to continue going higher.

Dovish Language

But the key policy-related language at the end of Wednesday rate statement was almost word-for-word what it was in the January statement, with a dovish tone:

“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating closed to potential and inflation on target,” policy makers said. “Governing Council will remains cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rets, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”


Policy makers had more to say about housing though, dedicating a full paragraph in the brief statement to the issue. The Bank of Canada said it will “take some time to fully assess” the impact of regulatory tightening, including tougher mortgage qualification rules that came into effect Jan. 1. In addition, the central bank said it continues to monitor the economy’s sensitivity to higher rates, and highlighted a recent deceleration in household credit.

The central bank’s assessment of recent economic developments was largely neutral. While policy makers highlighted slower than expected growth in the fourth quarter, they pointed out that it was driven by higher imports that were fueled by business investment, which they said adds to the economy’s capacity.

Inflation running at close to their 2 percent target suggests an economy operating near capacity, but wage growth levels are lower than what would be consistent with no labor slack. That too is largely a repeat.

More Highlights

  • New U.S. government spending and tax cuts should provide a boost to growth
  • 3 percent Canadian growth in 2017 was in line with projection in January monetary policy report
  • Strong housing data at end of 2017 indicates “some pulling forward of demand ahead of new mortgage guidelines and other policy measures”
  • Implications of recent federal budget will be incorporated into April monetary policy report
  • Inflation is fluctuating because of temporary factors

— With assistance by Erik Hertzberg, Lananh Nguyen, and Maciej Onoszko

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