(Bloomberg) -- The Bank of Canada left interest rates unchanged for a fifth straight decision and continued to signal it sees no need to move borrowing costs anytime soon, even as it expressed growing confidence the economy is rebounding.
At a rate decision Wednesday, policy makers in Ottawa said recent data have “reinforced” their view a recent slowdown at the end of 2018 and early 2019 was temporary. However, they said mounting global trade risks are “heightening uncertainty” around the outlook.
“In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate,” the central bank said in its statement, reiterating it will remain data dependent and closely monitor developments in household spending, oil markets and global trade.
No mention was made of any need for rate changes -- either up or down.
The recent policy pause -- after five rate increases since 2017 -- is a reflection of an economy only just emerging from a serious slowdown, and which remains too fragile to cope with higher rates. Even without global trade uncertainties, the recent weakness has opened up enough slack to warrant the need for stimulative rates, at least for now.
The Bank of Canada’s 1.75% benchmark rate remains below what it believes would be the “neutral rate” if no headwinds were present in the economy.
No Cuts
Still, the central bank has certainly shown no inclination to consider looser policy, though investors are betting on a cut over the next 12 months.
Governor Stephen Poloz has been reluctant to fully discard the idea that his next step is likely higher, which makes him one of the more hawkish central bankers globally. That position will only be reinforced by the positive tone of Wednesday’s statement.
Recent Canadian economic data are in line with the central bank’s projections last month, while evidence is “accumulating” that growth has begun to pick up in the second quarter, the statement said. It cited indicators that “point to” stabilization in housing, recovering production in the oil sector, stronger consumer spending and exports and a firming of business investment, along with employment gains.
“Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary,” policy makers said.
Inflation, meanwhile, has also been in line with expectations, and is expected to remain around the central bank’s 2% target, the Bank of Canada said, adding the lifting of U.S. metals tariffs and better prospects the new North American trade pact will be ratified have “positive implications for Canadian exports and investments.” The global economy is also evolving as expected, it said.
Negatives
The negatives were largely confined to three things: worries about the recent escalation of trade conflicts between China and the U.S., the impact of Chinese restrictions on Canadian canola exports and a reference to a sharp rise in inventories in the first quarter that may damp production in coming months.
Most analysts predict the Bank of Canada will resume raising interest rates again sometime next year -- in line with the central bank’s forecasts the economy will return to growth of around 2 percent in 2020, after it stalled at the end of last year and the beginning of 2019.
Investors are more pessimistic than analysts, betting on cuts rather than hikes. They see about an 80% chance of one rate cut over the next 12 months. In the U.S., conviction on lower rates is even stronger, with at least two rate cuts priced in over that period, fueled by escalating trade tensions between the U.S. and China, faltering global growth and soft inflation readings in the U.S.