(Bloomberg) -- The Bank of Canada fully abandoned its bias toward raising interest rates as the economy grapples with a slowdown, bringing its policy into line with the Federal Reserve and other major industrial central banks.
Policy makers in Ottawa left their benchmark overnight rate unchanged at 1.75 percent for a fourth straight decision Wednesday, and dropped a reference to future increases that had been in every rate statement since the end of 2017. The bank cited a series of factors -- from slower global growth to sluggish housing and oil sectors -- that brought Canada’s economy to a near halt over the past six months. Officials also laid out a more dour growth forecast for this year than economists are expecting.
“Governing Council judges that an accommodative policy interest rate continues to be warranted,” officials led by Governor Stephen Poloz said in the statement. “We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive.”
While Poloz had been reluctant to fully discard the idea that his next step is likely higher -- making him a bit of an outlier -- Wednesday’s changes indicate policy makers may now see the odds of the Bank of Canada’s next move as equally weighted between a hike and a cut, depending on how the economy unfolds.
Markets were largely anticipating the change in stance, pricing in no chance of any more hikes this year while placing some odds on a rate cut.
Yet even with the more dovish tilt, officials seem to be trying not to entrench market bets on lower borrowing costs. The Bank of Canada stuck to its expectations of a rebound from the current soft patch, and predicted the extra slack created by the slowdown will eventually be absorbed. It also characterized rates as accommodative, which suggests at least theoretically they remain below what would be the case if the economy faced no headwinds.
Neutral Rate
Emboldening rate-cut bets, however, may be a technical tweak by the Bank of Canada to revise down its estimate for the neutral rate by one quarter of a percentage point, to between 2.25 percent and 3.25 percent.
The neutral rate is the central bank’s best guess of the final resting place for borrowing costs when there are no headwinds, effectively a potential cap on how high rates could eventually go. The revision suggests current policy has been providing less stimulus to the economy than previously assumed.
The Canadian dollar fell after the statement’s release, extending losses to 0.6 percent at 10:09 in Toronto trading. The Canadian dollar was trading at 1.3499 per U.S. dollar.
Rebound Expected
Still, the basic narrative is that while Canada is in a period of slower-than-expected growth, officials continue to see many of the factors -- trade conflicts, adjustments in both the housing market and the oil industry -- as temporary.
The energy sector is grappling with the impact of low oil prices and pipeline constraints, while the global economic slowdown and continued trade tensions are weighing on investment and exports outside of the oil sector, the Bank of Canada said. Housing activity and consumption have also been weaker than expected.
As a result, the central bank revised down its estimates for growth this year to 1.2 percent, from 1.7 percent in its January forecasts, including a projection of hardly any growth during the first three months of 2019. That’s below economist expectations for growth of about 1.5 percent on the year.
Policy makers did, however, keep their estimate for 2.1 percent growth in 2020 and projected a 2 percent rate in 2021 as housing stabilizes, and investment and exports recover.
“Global economic activity is expected to pick up during 2019,” they said, “supported by accommodative financial conditions and as a number of temporary factors weighing on growth fade.”
Potential Growth
The Bank of Canada also reduced slightly its estimates of how quickly the economy can grow without fueling inflation, what they call potential growth. That means weaker growth over the past six months isn’t expected to increase slack as much as it would otherwise.
In the central bank’s evaluation of the appropriate degree of monetary policy, it said “we are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.”
Consumer price inflation is expected to remain close to the Bank of Canada’s 2 percent target throughout the projection period.
Officials also singled out the recent Ontario budget for adding another drag on growth, prompting the central bank to revise down its estimates for government spending.
--With assistance from Luke Kawa and Erik Hertzberg.
To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net
To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary
©2019 Bloomberg L.P.
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