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Bank of Canada holds interest rate, warns of ‘significant uncertainties’

Bank says some US proposals would have "material consequences'' for Canadian investment and exports.


OTTAWA — The Bank of Canada is holding its trend-setting interest rate at 0.5% – but it’s keeping a watchful eye on “significant uncertainties” that it warns could alter the economy’s improving trajectory.

The central bank’s scheduled rate announcement March 1 arrived as Canada tries to assess the direction of US economic policy under President Donald Trump and the potential fallout from any changes he may bring.

The bank has said some US proposals, which include tax cuts, a border tax and protectionist policies, would have “material consequences” for Canadian investment and exports.

In an unusually short statement, the Bank of Canada used slightly stronger language when referring to US uncertainties than it did in the news release that accompanied its last rate announcement on Jan. 18.

At that time, two days before Trump’s inauguration, the bank indicated that “uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States.”

On Feb. 28, the statement did not specifically mention the US uncertainty.

“The bank’s governing council remains attentive to the impact of significant uncertainties weighing on the outlook,” the release said.

In explaining the decision by governor Stephen Poloz’s council to stick with the current interest rate, the bank said that improvements seen in recent data releases have been consistent with its projections.

The central bank also expects growth in the fourth quarter of 2016 – as measured by real gross domestic product – might come in slightly stronger than predicted because of recent consumption and housing data releases.

On the downside, however, the bank said Canadian exports continue to face competitiveness challenges while the job market has seen weaker growth in wages and hours worked.

For inflation, the bank said it’s looking past January’s surprisingly robust headline figure of 2.1%. It said the number was a result of a temporary jump caused by higher energy prices that were largely tied to the implementation of carbon-pricing policies in Ontario and Alberta.

The Bank of Canada was widely expected to leave its benchmark interest rate untouched Wednesday, particularly with so much uncertainty surrounding the policy direction of the country’s largest trading partner.

Analysts were hoping to learn more about the bank’s thinking when it comes to potential US policy changes, but the brief statement offered few details.

The Bank of Canada has yet to factor in the full range of economic policies expected under Trump.

In January, the bank cautioned that its outlook only accounted for the possible effects of the expected US fiscal boost.

On the positive side, it said at the time that fiscal expansion in the U.S. would be a positive for Canada through increased foreign demand. But it added that Trump’s vow to cut corporate taxes would threaten Canadian competitiveness.

Trump has also pushed for the renegotiation of the North American Free Trade Agreement, though he has said the changes to the deal would only involve “tweaking.”

The US proposals have created significant concerns within Corporate Canada and for the federal government.

News from © Canadian Press Enterprises Inc. 2016

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