Published: Sat, December 08, 2018
Finance | By Loren Pratt

Bank of Canada maintains key interest rate at 1.75 percent

Bank of Canada maintains key interest rate at 1.75 percent

The central bank revealed Wednesday it will keep its benchmark interest rate - known as the target for the overnight rate - at 1.75 per cent.

More hikes are on the way, but the bank said the timing of its next one will hinge on changes in global trade policies as well as how higher interest rates from past increases affect consumption and housing.

The bank's overnight interest rate stays at 1.75 percent, still well below the "neutral" rate of 2.5-3.5 percent where monetary policy is neither stimulative or accommodative.

Despite the hold, the central bank plans to continue the gradual tightening initiated in 2017.

The bank raised its benchmark rate, known as the target for the overnight rate, to 1.75 percent level in October, the fifth time since July 2017 that it chose to hike.

"The current level of interest rates remains appropriate for the time being", Poloz said Thursday in a speech at an event hosted by CFA Society Toronto.

In announcing its decision, Canada's central bank said that it still needs time to fully assess the impact of its previous interest rate increases, as well as the effects of lower oil prices on the domestic economy before making any further adjustments to interest rates.

Sebastien Lavoie, Laurentian Bank's chief economist, said the wording of the Bank of Canada's statement signals a shift from its message at the October meeting when it seemed to be looking "more aggressively" at speeding up the pace of rate hikes. "And I said well, markets react to everything, they usually overreact to everything".

"We think the odds of a hike at the January 9 meeting, in just a bit more than a month, has fallen significantly".

Recent data, the bank noted, also show the economy has less momentum heading into the final quarter of 2018.

This morning's announcement comes in the wake of a move by the Alberta government to curtail oil production in the province after January 1 to try to clear a crude storage glut that has driven western Canadian oil prices to multi-year lows. In light of these developments and associated cutbacks in production, activity in Canada's energy sector will likely be materially weaker than expected. Business investment outside the energy sector is expected to strengthen with the signing of the USMCA, new federal government tax measures, and ongoing capacity constraints.

It will also be watching for positive developments such as more signs the economy can still expand without fuelling inflation. CPI inflation, at 2.4 per cent in October, is just above target but is expected to ease in coming months by more than the Bank had previously forecast, due to lower gasoline prices. Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth.

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