BoC holds benchmark rate, cites weakness

The BoC is leaving its trend-setting interest rate unchanged because, despite a recent run of stronger-than-expected data, it believes the economy has yet to show it can stick to the higher growth trajectory.

In holding the rate at 0.5%, the central bank says it also considered significant uncertainties still weighing on its outlook — including the unknown yet potentially adverse impacts of the U.S. economic agenda.

The bank says Canadian growth exceeded its expectations, and it now predicts the economy will expand at an annual rate of 2.6% in 2017 — up from its January forecast of 2.1%.

It says the improvement was largely fuelled by unexpectedly robust residential investment, as well as temporary factors such as the resumption of expenditures in the energy sector and the consumer-spending lift from bigger child-benefit cheques.

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However, the bank also says export growth has been uneven, and there have been continued signs of weakness in business investment and employment indicators of hours worked and wages.

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Avery Shenfeld, managing director and chief economist at CIBC Capital Markets, says in an economics note that greater capital spending and some momentum in exports are needed before a more hawkish tone can be expected.

“It will also be easier for the Bank to start talking about rate hikes after a further hike or two from the Fed, which would prevent rate hikes in Canada from lifting the [Canadian dollar] materially,” he says.

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The bank now predicts economic growth will slow to 1.9% in 2018.

Staff, with files from The Canadian Press

The Canadian Press is a national news agency headquartered in Toronto and founded in 1917.