By Gordon Isfeld
OTTAWA (MaceNews) – The Bank of Canada kept its interest rate target unchanged at 1.75%, as expected, but is watching closely as global economic growth slows, the bank said Wednesday.
“A growing number of countries have responded with monetary and other policy measures to support their economies,” the Bank of Canada said in its quarterly Monetary Policy Report.
Global growth is expected to slow to below 3% this year — the weakest pace of output since the 2007-09 crisis — before edging up over the next two years, the bank said.
“Canada has not been immune to these developments,” the bank said. The bank is concerned about uncertainty linked to the US-China trade dispute.
“Commodity prices have fallen amid concerns about global demand. Despite this, the Canada-U.S. exchange rate is still near its July level, and the Canadian dollar has strengthened against other currencies.”
The bank expects growth of 1.5% this year — up from the previous estimate of 1.3% — followed by an increase of 1.7% in 2020 and a gain of 1.8% the next year.
The bank compared domestic growth to that of United States – Canada’s largest trading partner — which is forecast to grow 2.3% this year, but likely to ease to 1.9% in 2020 and 1.7% in 2021. The bank noted the impact of the ongoing US-China trade dispute.
“Although negotiations have recently shown some signs of progress, global uncertainty has been increasing,” the bank said.
“These factors have contributed to a further deterioration in growth prospects and a fall in commodity prices. In response to weaker outlooks and lower inflation expectations, many central banks have eased monetary policy. These central bank actions have helped maintain financial conditions that support growth.”
BoC Governor Stephen Poloz, speaking to reporters following the interest rate announcement, acknowledged the impact of the increasingly uncertain economic environment.
“Not surprisingly, the worsening global situation was the primary issue,” Poloz said. “Economic forecasts have been marked down further in most countries, largely as a consequence of the escalation of trade actions and uncertainty around what may be next.”
The governor stressed that “Canada is not immune to these global developments. In fact, Canada was one of the first countries to feel the effects of trade policy uncertainty, since NAFTA was the first target of the Trump administration.”
Uncertainty around the trade issue “has been weighing on investment in Canada for the past three years,” Poloz said.
“These were important headwinds preventing Canadian interest rates from rising by as much as U.S. rates did during 2017-18. Nevertheless, as other economies feel a growing impact from the trade war, there are second-round impacts on Canada through weaker exports and lower commodity prices.”