Canada Monetary Policy December 2018

Canada

Canada: Bank of Canada leaves rates unchanged, striking slightly more dovish tone

December 5, 2018

On 5 December, the Bank of Canada (BoC) left its target for the overnight rate unchanged at 1.75%, as widely expected by market analysts.

The decision to hold followed a rate hike at the prior meeting, and was reinforced by the recent sharp fall in oil prices, which will weaken the energy sector and likely hurt investment and export growth. This comes after growth slowed in Q3 in SAAR terms on weaker business investment. On the price front, although inflation was above the print recorded in October, the Bank now sees it decelerating to the 2.0% target earlier than expected on lower gasoline prices, reducing the pressure on the Bank to hike rates.

The Bank reiterated its commitment to a neutral long-term target of 2.50% to 3.50% for the overnight rate. However, the BoC adopted a slightly more dovish stance in the light of the recent oil price shock, and provided no concrete timeline for further rate hikes. The Bank highlighted the future evolution of oil prices, global trade policy and the economy’s capacity—particularly given recent downward revisions to historical GDP data—would be key factors influencing future policy decisions.

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

“The bottom line is that recent developments are clearly negative, but there remains a light at the end of the tunnel. As the economy works through the shocks, however, there is clearly less urgency to move rates higher in the near-term. There is little to be lost by waiting for confirmation that recent events are indeed temporary, and expected developments in investment, exports, etc. are in fact occurring. Holding off until Spring to move its policy interest rate higher looks like the best way for the Bank of Canada to gain some certainty on the narrative with little cost from an inflation-control perspective.”

The Bank’s next monetary policy announcement is scheduled for 9 January.

FocusEconomics Consensus Forecast analysts see the target for the overnight rate ending 2019 at 2.35%. For 2020, analysts expect the rate to end the year at 2.47%.


Author:, Economist

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Canada Monetary Policy Chart


Canada Monetary Policy December 2018 0

Note: Target for the Overnight Rate in %.
Source: Bank of Canada (BoC).


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