Bank of Canada Holds Interest Rates at 1.25 Percent

Bank of Canada Holds Interest Rates at 1.25 Percent

On Wednesday, the Bank of Canada chose to keep its benchmark interest rate at its current status of 1.25 percent, but gave a word of caution regarding future hikes.

Today is the most important day, and we'll see the Bank of Canada's decision on interest rates, as well as the Bank's Monetary Policy Report.

Mr. Poloz said this "investment/export nexus", as he called it, is at the heart of the interest-rate question for the Bank of Canada.

Exports and business investment in Canada have been held back by competitiveness challenges and trade-policy uncertainties, which include escalating geopolitical conflicts that risk damaging global expansion, the bank said. The mere fact that the Bank of Canada now sees inflation nudging above 2 per cent for the next couple of years does not, on its face, imply that the bank will be more aggressive on rate.

Most economists expect the central bank to retain its key rate at 1.25 per cent, the level it has been at since the last quarter-point increase in January. The Monetary Policy Report notes rebounding conditions, but areas of concern remain: youth labor market participation is still seen as weak, while long-term unemployment is seen as elevated.

The Canadian dollar slipped after the report, down 0.4 percent to C$1.202 per USA dollar at 10:44 a.m. Toronto time.

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At 15:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was slightly bearish at -59.9176, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 18.8721. "The reason is not because a hike in administered rates is expected rather, it is a result of some conflicting domestic themes - each arguing for a conflicting policy response - that are creating legitimate confusion over the path of rates".

What sector will play the biggest role in shaping Canada's economy this year?

Inflation in Canada is close to 2 per cent as temporary factors that have been weighing on inflation have largely dissipated, as expected. Others argue that the BoC is likely to raise rates following the BoC's business outlook survey (which was fairly optimistic) and Trump's focus on currency devaluation by trading partners. "Those capacity issues require both a higher level of trend labour supply as well as capital investment", says Pollick.

Annual potential output growth is projected to remain at 1.8% over the projection horizon, before increasing to 1.9% in 2021. The outlook for the US economy has been further boosted by new government spending plans. "This is the rub and, creates an extremely dynamic environment for the Bank", Pollick adds.

Growth in consumption remains robust, supported by strong labour income growth. That would increase Canada's ability to cultivate its exports, which would probably mean more economic growth - and faster growth would typically suggest earlier/more rate increases.

Since then, there has been fresh fear that if inflation slows and wage growth picks up, BoE policymakers may refrain from acting due to the economy "self-regulating".

This helped the pair to climb from the low 1.25 region towards the 1.26 region where it trades as of this writing.

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