/Bank of Canada holds key interest rate at 1.75%

Bank of Canada holds key interest rate at 1.75%

The Bank of Canada will end 2019 as one of the only central banks that is navigating the trade wars without cutting interest rates.

Governor Stephen Poloz and his inner circle of deputies left the benchmark rate unchanged at 1.75 per cent on Dec. 4, marking the ninth consecutive policy meeting at which the central bank’s leaders opted to stay the course.

That’s remarkable, as the past 12 months have brought dozens of interest-rate cuts by other central banks in response to the slowest global economic growth since the financial crisis.

There is also no suggestion in the new statement that the Bank of Canada sees that changing anytime soon. Policymakers seem cautiously optimistic that Canada has survived the storm, noting that business investment “unexpectedly showed strong growth” in the third quarter, and that recession fears appear to be waning.

“The bank’s October projection for global economic growth appears to be intact,” the statement said. “There is nascent evidence the global economy is stabilizing, with growth still expected to edge higher over the next couple of years.”

To be sure, that flicker of hope could prove ephemeral.

The trade wars had quieted as the Governing Council wrapped up its latest round of deliberations earlier this week. But in the past 48 hours, Donald Trump’s administration has threatened France, Brazil and Argentina with new tariffs, and the U.S. president said an anticipated peace deal with China may not happen after all. Stock markets slumped on the most recent wave of uncertainty.

“Ongoing trade conflicts and related uncertainty still are weighing on global economic activity, and remain the biggest source of risk to the outlook,” the Bank of Canada said.

But for now, the Canadian central bank appears pleasantly surprised by the economy’s resilience.

Gross domestic product in the third quarter increased at an annual rate of 1.3 per cent, an uninspiring result, but exactly the outcome that the bank had predicted. Policymakers observed that consumer spending and housing remained sources of “strength.”

They clearly didn’t anticipate adding business investment to that list. That growth engine roared back to life in the third quarter, posting growth at an annual rate of 9.5 per cent, reversing a seven per cent drop in the second quarter, led by spending on transportation equipment and engineering projects.

Officials indicated they weren’t quite ready to believe investment is as solid as the new numbers indicate.

“The bank will be assessing the extent to which this points to renewed momentum in investment,” the statement said.

Still, evidence of a rebound in investment is reason to leave interest rates unchanged, at least until the central bank updates its forecasts in January.

Policymakers said they continue to “monitor the evolution of financial vulnerabilities related to the household sector,” which is how the Bank of Canada expresses its concern about elevated levels of household debt. Credit growth has jumped to its fastest in a couple of years, a reminder that Canadians will borrow as much as their banks will give them.

The resurgence is driven by lower mortgage rates, which fell as the U.S. Federal Reserve cut borrowing costs this summer. The Bank of Canada will resist adding extra incentive for as long as it can.

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