Bank of Canada Abandons Rate-Hike Bias Amid Economic Slowdown

The Bank of Canada fully abandoned its bias toward raising interest rates as the economy grapples with a slowdown, bringing its policy in 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.

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 now expect interest rates to remain on hold indefinitely as the economy copes with a series of headwinds that the central bank believes brought Canada’s economy to a near halt over the past six months.

“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.”

The bank cited a series of factors — everything from slower global growth to sluggish housing and oil sectors — for the weaker outlook, which includes a more dour growth forecast for this year than economists are expecting.

Market Reaction

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. The odds of a cut at the September meeting were at 30 percent after the announcement, according to trading in the swaps market, with a more than 90 percent chance of a reduction over the next 12 months.

“The statement tilted dovish, but anything else would have been a disappointment relative to the reality of the data,” Toronto-Dominion Bank Chief Economist Beata Caranci said. They can’t “ignore the fact that the data has disappointed for several quarters.”

The loonie weakened and bond yields fell on the shift in bias. The Canadian currency dropped 0.5 percent to C$1.3488 per U.S. dollar, the lowest since Jan. 3. One dollar buys 74 U.S. cents. The yield on Canada’s two-year note, the most sensitive to Bank of Canada moves, dropped 5 basis points to 1.52 percent at 12:52 p.m. in Toronto.

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.

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 has been 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.

Downward Revisions

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.

Source: https://www.bloomberg.com/news/articles/2019-04-24/bank-of-canada-abandons-rate-hike-bias-amid-economic-slowdown?srnd=premium-canada