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Canada Monetary Policy March 2018

Canada: Bank of Canada leaves rates unchanged in March on weak incoming data amid concerns over NAFTA and the housing market

On 17 March, the Bank of Canada (BoC) left its target for the overnight rate unchanged at 1.25%, as widely expected by market analysts. The decision to hold rates came as risks to the economy continue to intensify, especially with respect to the future of the North American Free Trade Agreement (NAFTA) and the ongoing adjustment of the housing market to recently legislated cooling measures.

Recent data has been lukewarm but has mostly come in line with the Bank’s expectations. Full-year economic growth in 2017 came in at 3.0%, matching the Bank’s January projection. That said, growth in the fourth quarter was slower than expected as household spending continued to weaken, reflecting consumers’ sensitivity to higher interest rates—a trend which appears to have carried into the first quarter. In the housing market, demand has weakened in the first quarter as higher borrowing costs and recently announced provincial measures to cool the market have weighed on homebuyers. Meanwhile, the Bank has had to also consider inflationary pressures running close to target and improving wage growth, although neither factor warranted a rate hike in March.

Economic developments since the outset of the year have put the Bank on its back foot, with soft incoming data delaying any further tightening for now. In light of the tepid figures, the decision in March included more dovish language, as the Bank again avoided mention of any timeline for the pace of future hikes—only that higher rates would be warranted over time as a check on inflation. That said, substantial risks exist if the Bank hikes rates too quickly. Of particular interest to the Bank over the short term will be developments in the ongoing NAFTA renegotiations, which pose considerable downside risk for the economy should the trade pact unwind. Moreover, highly indebted households have already been finding the Bank’s tightening burdensome, and a further ratcheting up of rates could threaten both consumer spending and the health of the housing market.

The Bank’s next monetary policy announcement is scheduled for 18 April.

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