Bank of Canada keeps key interest rate on hold, expects inflation to remain around target rate in months ahead

The Bank of Canada stood pat today, keeping its overnight interest rate at 1.75 percent. The central bank’s statement came with the decision had a ‘business as usual’ tone, implying that there continues to be impetus to move the policy interest rate. The central bank judges that “the degree of accommodation being provided by the current policy interest rate remain appropriate”.

The central bank noted that there is accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup. The statement pointed to recovering oil production, a more stable housing market, and continued solid job growth. The Bank of Canada sees signs of a pickup of consumer spending and exports in the second quarter, as well as business investment that has “firmed”.

The downsides stem from the external environment. The global economy is characterized as moving in line with the Bank’s expectations, but trade conflicts have driven uncertainty higher. Chinese trade restrictions are affecting Canadian exports, although the removal of steel and aluminium tariffs and better prospects for making CUSMA law might serve to counterbalance the negatives, noted TD Economics in a research report. On the inflation front, the central bank expects inflation expected to remain around the 2 percent target in months ahead.

“Overall, today's short statement appears to have been built with tempering market expectations in mind. Carefully balancing near-term positives with longer-term risks and maintaining data dependency suggests that markets may be getting ahead of themselves in skewing the odds towards a rate cut later this year (implied odds stood at about 30 percent following the statement, roughly unchanged). It seems that we'll need to see a deterioration in the economic data to spur easing, which, for the time being, is not in the cards – neither in the Bank's view, nor ours”, added TD Economics.

At 17:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was bullish at 81.4417 while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 85.2283 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex