Canada’s central bank left its benchmark target for the overnight rate steady at 1.75 percent but turned slightly more dovish as the outlook is clouded by “escalating global trade conflicts and geopolitical tensions” that is weighing on business sentiment despite stronger-than-expected economic growth in the second quarter.
The Bank of Canada (BOC), which has kept its key rate steady since October 2018, said the economy, as expected, was returning to its growth potential after temporary weakness in late 2018 and early 2019, and raised its 2019 growth forecast to 1.3 percent from April’s forecast of 1.2 percent as a surge in oil production helped propel growth, consumer spending continues to grow steadily and residential investment appears to have stabilized.
But softer foreign demand, lower commodity prices and trade restrictions are leaving their negative impact and BOC lowered its 2020 growth outlook to 1.9 percent from a previous 2.1 percent. The outlook for 2021 was unchanged at 2.0 percent.
Canada’s gross domestic product grew 1.3 percent year-on-year in the first quarter of this year, down from 1.6 percent in the previous quarter, but BOC raised its forecast for growth in the second quarter to 1.3 percent from 1.0 percent in its latest monetary policy report.
After holding its rate steady at 0.50 percent for two years, BOC in July 2017 began tightening its monetary policy stance and raised its rate five times before pausing in October 2018 as the global economic momentum began to wane.
As other major central banks, BOC turned more dovish in the beginning of this year but in May it turned slightly more upbeat as it became clear the slowdown at the end of last year and early this year was temporary and the economy was beginning to rebound.
Today’s statement is slightly more downbeat than in May, reflecting an economy that is growing around its potential but uncertainty from trade conflicts and global tensions is taking a toll on business sentiment and clouding the outlook.
“Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate,” BOC said, adding it would be paying particular attention to the energy sector and the impact of trade conflicts on the prospects for growth and inflation in incoming data.
The Bank of Canada issued the following statement:
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