Bank of Canada leaves key interest rate unchanged, while leaving the door open to future hikes

Yahoo Finance Canada

As expected, the Bank of Canada has left its key interest rate unchanged.

The central bank says it will remain data dependent while paying special attention to household spending, oil markets, and the global trade environment.

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The overnight interest rate has been 1.75 per cent since October 2018, after the central bank hiked it five times since the middle of 2017.

Despite a string of blockbuster jobs reports, economic growth remains muted. But the central bank is cautiously optimistic that things will pick up.

“Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed.” said the Bank of Canada, in a news release.

“That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.”

There’s also still uncertainty around USMCA, which still hasn’t been ratified. Not to mention global concerns like Brexit, and President Donald Trump waging trade wars with Japan, Europe, and China.

“The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports,” said the Bank of Canada.

Bank of Canada Governor Stephen Poloz arrives at a news conference upon the release of the Financial System Review in Ottawa, Ontario, Canada, May 16, 2019. REUTERS/Chris Wattie
Bank of Canada Governor Stephen Poloz arrives at a news conference upon the release of the Financial System Review in Ottawa, Ontario, Canada, May 16, 2019. REUTERS/Chris Wattie

“In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.”

Moments after the announcement, the loonie was trading lower.

“Overall, the statement doesn't explicitly warn of rate hikes to come (that remains data dependent), but has an optimistic tone about what lies ahead, leaving the impression that the Bank sees the next move as a hike, if well down the road,” said Avery Shenfeld, chief economist at CIBC.

“We're surprised at the initial market reaction (C$ weakened a bit and 2 year yields went lower), as our reading of this wasn't much different than what we would have expected.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitte@jessysbains

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