OTTAWA — The Bank of Canada left its main interest rate unchanged Wednesday at 0.50%, while sounding a positive note about recent economic indicators that point to “very strong” growth in the first quarter.
The central bank said it expects growth to tail off somewhat in the second quarter. It also cautioned in its statement that trade-policy uncertainty in Washington continued to cloud the outlook, and subdued inflation and wage growth were consistent with “excess” slack — or unused production and labor capacity — in the economy.
The decision to leave its benchmark rate as is was widely expected in a survey of 11 primary dealers of Canadian government securities. The Bank of Canada’s policy interest rate has been at 0.50% since July 2015.
Economists expected the central bank to maintain a cautious tone, amid the risk posed by changes in U.S. trade policy for Canada’s economy. Roughly three-quarters of Canadian exports, or the equivalent of 20% of the country’s total economic output, are U.S.-bound.
The most notable difference between Wednesday’s rate decision and the statement it delivered last month was an increased sense of optimism about a turnaround in Canadian economic activity.
“The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment,” the bank said in its five-paragraph statement explaining its rationale to maintain the status quo on rates. The central bank has long waited for an upswing in capital spending and nonenergy exports to help drive growth, and take over from debt-laden consumers.
“The bank’s monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.”
A recent string of strong manufacturing and retail and wholesale sales data prompted some economists to suggest first-quarter growth was tracking close to a 5% annualized gain, or well above the Bank of Canada’s call for 3.8% growth and the 0.7% advance the U.S. recorded in the same period, according to early estimates.
“This is no longer a decidedly neutral stance from the Bank of Canada,” said Jimmy Jean, economist at Desjardins Capital Markets in Montreal. He said its emphasis on positive developments is the first step toward “preparing the market and public toward the end of very stimulative policy.”
The Bank of Canada said the global economy continues to gain traction and recent developments reinforce its view that global expansion will strengthen in the medium term. It noted Canadian export growth remains subdued, due to competitiveness challenges faced by domestic firms.
Consumer spending and housing continue to drive growth in Canada, lifted by improving labor-market conditions, the Bank of Canada said.
As for housing, the central bank said tools apart from interest-rate policy have yet to have a “substantial cooling effect” on prices. Since its last statement, the province of Ontario introduced several measures, among them a tax on foreign buyers of homes, to take some froth out of the Toronto market. Bank of Canada Gov. Stephen Poloz warned last month that speculators were playing a larger role in driving up house prices in Canada’s biggest city, and said the increases — upward of 30% year over year — weren’t consistent with economic fundamentals.
The next Bank of Canada rate decision is July 12, at which time it will update its economic outlook.
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