The Bank of Canada held its monetary policy meeting last week on Wednesday. As widely expected, the central bank left the key interest rates unchanged amid a sudden and a sharp slowdown in the nation’s economic growth in the final months of 2018.
The weakness in the data made policymakers pause the rate hikes and rethink the case for further tightening.
The benchmark interest rates were held steady at 1.75%. This was a ten-year high as widely expected by the overnight swap markets.
The Canadian dollar extended losses after the monetary policy meeting. This came as the Bank of Canada reversed its hawkish stance from the previous meetings. Before, the central bank had indicated that further rate hikes were necessary.
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However, this stance changed as the bank claimed that due to increased uncertainty, the timing of future interest rate hikes would depend on the data.
In its monetary policy statement, the BoC said:
“Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR).”
The statement continued:
“While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.”
The BoC has remained staunchly hawkish in its monetary policy meetings so far, judging that further rate hikes were necessary. The markets had therefore allocated room for at least two rate hikes this year. The hawkish forward guidance came despite the US Federal Reserve pausing the increase of their own interest rates.
At the January meeting, the BoC lowered the outlook for 2019. This came due to the fall in oil prices in the latter part of last year. Back then, the BoC claimed that the impact of lower prices was temporary and that higher rates were required.
However, the economic data released over the previous weeks showed that the momentum in the Canadian economy had stalled in the fourth quarter of 2018. This cast doubts on the central bank’s views.
Canada’s GDP advanced just 0.4% on an annualized basis in 2018. This was the weakest pace of growth in nearly three years. The 0.4% GDP growth was one of the sharpest slowdowns in the economy, following a 2.0% and 2.9% increase in GDP in the previous two quarters.
The central bank stated that this economic slowdown in Q4 meant that officials now expect growth during Q1 of this year to be weaker than it had previously forecast. The bank reported:
“Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”
The BoC also noted that due to the increased uncertainty surrounding the timing of future rate hikes, policymakers would be closely assessing the incoming data. This would particularly true for household spending, the international oil markets, and the global trade policy.
The CAD was one of the weakest performing currencies since the Friday after the GDP report was released. It weakened close to 1.5% against the US dollar as a result. Following the BoC’s decision, the CAD fell a further 0.6% against the USD.