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Canada Monetary Policy May 2019

Canada: Bank of Canada leaves rates unchanged in May

On 29 May, the Bank of Canada (BoC) left its target for the overnight rate unchanged at 1.75% as had been widely expected by market analysts.

The Bank’s decision to stand pat was reinforced by under-control inflation, which hit the midpoint of the Bank’s target range of 1.0% to 3.0% in April. Moreover, the Bank expects inflation will be around the midpoint in the coming months. On the domestic front, while the Bank reiterated that the slowdown which began in late 2018 was most likely temporary, the BoC highlighted increasing trade tensions, which justified the continuing accommodative monetary stance.

Going forward, the Bank will likely keep rates unchanged in the near-term amid a moderate global growth outlook, tepid domestic price pressures and a more dovish monetary stance by the U.S. Federal Reserve. That said, the BoC was slightly less dovish compared to its previous statement, appearing more upbeat regarding the domestic economy, due to positive data from the labor and housing markets; Trump’s decision to lift steel and aluminum tariffs; and the increased likelihood of the ratification of the USMCA.

Commenting on the BoC’s decision, Brian DePratto, senior economist at TD Economics, noted:

“Carefully balancing near-term positives with longer-term risks and maintaining data dependency suggests that markets may be getting ahead of themselves in skewing the odds towards a rate cut later this year (implied odds stood at about 30% following the statement, roughly unchanged). It seems that we’ll need to see a deterioration in the economic data to spur easing, which, for the time being, is not in the cards – neither in the Bank’s view, nor ours.”

Highlighting the BoC’s slight change in tone since the last meeting, James Smith, an economist at ING, commented:

“Having taken a more dovish line back in April, the Governing Council struck a more upbeat tone on growth, which it expects to regain momentum over the next few quarters. This follows a recent interview, where BoC Governor Stephen Poloz mentioned how–once growth headwinds dissipate–interest rates could feasibly start rising again. This suggests that the medium-term policy bias is still, if anything, tilted slightly towards further tightening.”

The Bank’s next monetary policy announcement is scheduled for 10 July.

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