Bank of Canada Keeps Interest Rate Steady At 0.5%

The Bank of Canada is holding its benchmark interest rate at 0.5 per cent as it sees the stronger world economy continuing to face “undiminished” uncertainty.

The decision was in line with expectations with all major banks expecting rates to be left unchanged at this meeting.

In Canada, the dynamics of growth are largely as the Bank anticipated with a strong rebound in the third quarter following a very weak half, but more moderate growth is anticipated for the fourth quarter. Global economic conditions have strengthened, but uncertainty has increased and yields have moved higher.

Last week, Bank of Canada governor Stephen Poloz addressed how the bank views the uncertainty following the U.S. election. He said it was too soon for the central bank to factor the potential impacts of president-elect Donald Trump’s election win into its decision making.

The bank said inflation, which it carefully analyzes when making rate decisions, was slightly below what it had anticipated, in large part because of lower food prices.

While the statement accompanying the bank's decision didn't mention him by name, Donald Trump's election appears to be a big factor in the bank's decision-making.

"Following the election in the United States, there has been a rapid backup in global bond yields, partly reflecting market anticipation of fiscal expansion in a U.S. economy that is near full capacity," the bank said. "Canadian yields have risen significantly in this context."

That's the bank's way of saying that bond yields have crept higher since Trump was elected, so the bank sees some merit in staying on the sidelines until some of that uncertainty settles down.

The bank said on Wednesday that “the effects of federal infrastructure spending are not yet evident in the GDP data.”

“Meanwhile, business investment and non-energy goods exports continue to disappoint,” said the bank. “There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States. While household imbalances continue to rise, these will be mitigated over time by announced changes to housing finance rules.”

“Even with a much more upbeat financial market environment overall, I think the bank still has significant concerns about the weakness in exports and business investment, in particular,” said Porter, who added that fresh trade data this week showed that, yet again in 2016, the monthly export volumes continued to fall.

“Even excluding the resource sector and the energy sector, we’re seeing exporters struggling a bit — and that’s even with a Canadian dollar that most would gauge to be fairly competitive.”

The bank’s statement also highlighted recent steps taken by the federal government to try and boost economic growth.

The Canadian dollar edged stronger after the decision with USD/CAD at 1.3265 from 1.3285, although overall movement was limited with a weaker US currency the prime influence.