Central bank keeps overnight rate at 1%; Canadian dollar dips

The Canadian dollar fell almost nine-tenths of a cent after the Bank of Canada used a tone that analysts are saying was more dovish than expected when it announced this morning (December 6) it was keeping the overnight rate at 1%, where it has sat for the last three months.

Canada’s jobless rate is at a near-record low of 5.9%, but the central bank said it still believes there is labour market slack, and it will take a cautious approach on further rate hikes, making a rate change in January look unlikely.

“While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation,” the Bank said in its announcement.

The statement said recent data has been in line with what the Bank forecast in October, when it called for moderate growth that remained above potential in the second half of 2017. Exports slipped in Q3, but this is expected to rebound as foreign demand intensifies.

“[The Bank of Canada’s statement has] generally upbeat commentary on the economy, but later they note that prior upward revisions to GDP also suggest the economy has higher potential growth than previously estimated,” said Douglas Porter, chief economist for BMO Financial Group, in a note to investors. “The [Bank of Canada] has recently been using a potential GDP growth rate of between 1.3% and 1.5%.

“Look for a sizeable revision to that view in the April Monetary Policy Report.”

The next overnight rate announcement is scheduled for January 17, 2018. Porter said BMO expects the next rate hike will occur in the March announcement.