Published: Wed, July 10, 2019
Finance | By Loren Pratt

Bank of Canada holds rates, frets about trade war damage

Bank of Canada holds rates, frets about trade war damage

"As [the bank's] Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation". However, the Bank of Canada doubts that burst of activity will last.

Fears of global trade disruptions have intensified in recent months as the Trump administration in the USA has raised tariffs on Chinese goods in an effort to pressure the Asian power to agree to a new trade pact. A weaker-than-expected growth projection however "provides some caution on the bank's view on the durability of the rebound".

She predicted similar growth in both economies by the second half of 2019 - and argued the process is one of "convergence" rather than "divergence". Canadian two-year bond yields were also down 5 basis points to 1.59%, the biggest drop in nearly a month. Stocks are also paring gains.

Its quarterly Monetary Policy Report will be released at 10 a.m. ET.

Even with the unexpectedly strong rebound, those looking for fresh hints about the timing of the bank's next policy move - hike or cut - will likely have to wait a little longer, several experts say.

What does the Bank of Canada's tone mean for you?

In testimony today to USA lawmakers, Federal Reserve Chairman Jerome Powell seems to have pushed the central bank closer to cutting interest rates this month by saying the economy continues to face downside risks including the U.S. -China trade fight have rippled through the world's economy.

The Canadian economy is rebounding at a stronger-than-expected pace from a weak run that almost ground the economy to a halt in late 2018 and early 2019.

"Following temporary weakness in late 2018 and early 2019, Canada's economy is returning to growth around potential, as expected", reads a statement from the bank, which credited "stronger than predicted" growth in spring partly to the "reversal of weather-related slowdowns...and a surge in oil production".

If all protectionist measures were rolled back and the uncertainty surrounding the multilateral trading order disappeared, global activity would be roughly 1 per cent higher by the end of 2021 relative to current forecasts, and the Canadian economy would be about 2 per cent larger.

Global trade tensions, meanwhile, have escalated, particularly between the US and China, forcing policy makers to mark down their projections for global growth and lower estimates for business investment and exports. The changes, including stricter inspections on Canadian goods by Chinese authorities, have come amid a bilateral diplomatic dispute.

Canada´s central bank on Wednesday held its key lending rate at 1.75 percent in line with economists´ expectations, while revising its growth forecast for the Canadian economy upwards. However, the outlook is clouded by persistent trade tensions. Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks.

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ percent.

"Evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook", the central bank said in a statement.

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