Central bank holds rate, notes ‘increased uncertainty’ on timing of future hikes

Central bank holds rate, notes ‘increased uncertainty’ on timing of future hikes

The bank says it had been expecting a drop in household spending as well as weak numbers for exports and investment in oil-producing provinces over the final three months of 2018.

However, the country's slowing economy has led to building uncertainty about the timing of future rate hikes, a stark change from the Bank of Canada's statement in January that rates were expected to rise to an estimated range of between 2.5 and 3.5%.

The Canadian economy lost significant momentum in the latter half of 2018, in part due to oil sector curtailments, but the weakness made itself evident in almost all components, such that final domestic demand contracted for a second quarter.

It also warned the first half of 2019 - and not just the first quarter as it had predicted in January - appeared to be on track for additional economic disappointment.

It's a mixed picture, and we need more time and more data to better understand what's going on.

Bank of Canada governor Stephen Poloz is next scheduled to meet with other members of the bank's governing council and reveal their decision on where to set the bank's interest rate on April 24, 2019. Further, the greater uncertainty and data dependence highlighted by the Bank of Canada could provide a tailwind for the Dollars moving forward as the language is priced in to the market's expectation of future rate hikes.

However, the BoC gave no hint at a potential rate cut even as talk of an economic recession mounted after dismal fourth quarter of 2018 economic growth of 0.4 percent.

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Indeed, the central bank's neutral rate range has become contentious, with bond investors warning that it may be too high for Canada's debt-laden economy, hurting its use as a signpost for monetary policy.

But last week's data showed a much deeper slowdown than anyone anticipated, casting doubt on the underlying strength of the expansion. But the job market is still strong and wages are rising.

The loonie fell 0.7 per cent to $1.3439 per USA dollar, touching the weakest since January 4 and paring its 2019 advance to 1.5 per cent. Yields on two-year Canadian government bonds dropped 8 basis points to 1.66 per cent, the lowest since December. TD securities notes the latter has seen double-digit annualized declines in two straight quarters.

Economists agree there is little justification for a rate hike for most of 2019. Trade tensions and uncertainty continue to dampen these components of growth.

"It is clear that global economic prospects would be buoyed by the resolution of trade conflicts", said the bank.

It acknowledges progress in ongoing U.S.

On the inflation front, the Bank appears to have slightly downgraded its forecast, now expecting inflation to stay below its 2% target this year reflecting energy price impacts and a softer economic backdrop.

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