- As expected, the Bank of Canada left its policy interest rate at 1.75% this morning.
- The Bank’s policy statement noted that its global outlook remains intact, but further expounded on the improvement in financial market sentiment and “waning recession concerns.”
- The statement noted that Canadian economic growth slowed in the third quarter, but the rest of its characterization noted underlying strength, particularly in housing investment and “unexpectedly” in business investment spending. It added that “the Bank will be assessing the extent to which this points to renewed momentum in investment.”
- As it did in October, the Bank hinged future policy decisions on its assessment of “the adverse impact of trade conflicts against the sources of resilience in the Canadian economy – notably consumer spending and housing activity.”
Key Implications
- The Bank of Canada’s past statement in October closed similar to this one, but with a reflection that “the resilience of Canada’s economy will be increasingly tested.” Since then, and as recognized by the Bank’s economic characterization today, the available evidence suggests that it has remained up to the challenge.
- This statement re-emphasized that external risks are an important factor for the Bank of Canada, but the rally in the bond market since the start of the year has provided an important offset to global uncertainty. The 50 basis points move in Canadian mortgage rates goes a long way in explaining the robust rebound in the housing market and acceleration in household credit growth. This has come without any helping hand from the Bank of Canada.
- In a perfect world, reduced global uncertainty would lead to a re-acceleration in business investment and exports, but we have become accustomed to lowering our expectations on this front. The Bank of Canada will remain cautious to the financial stability risks of relying on household borrowing to support growth. Still, in a risk-filled outlook, with any signs of economic deterioration, it may yet choose to err on the side of supporting growth and relying on other tools to mitigate financial stability risks.
