Bank of Canada maintains overnight rate as global outlook improves

The Canadian dollar slipped after the Bank of Canada announced April 18 it is maintaining the overnight rate at 1.25%, where it has sat since January.

While trade issues were noted as a concern, NAFTA was not mentioned specifically. In a press release, Canada’s central bank said the global economy is forecast to grow at a faster pace than forecast in January as both anticipated growth and potential output have been revised upward “In a number of major advanced economies.”

“The outlook for the U.S. economy has been further boosted by new government spending plans,” the Bank said. “However, escalating geopolitical risk and trade conflicts risk undermining the global expansion.”

Foreign demand is expected to increase, leading to strengthening exports, but this is not anticipated to be enough to make up some of the lost ground seen in previous quarters. Business investment is forecast to increase, but overall, trade uncertainty is weighing on the outlook.

BMO Capital Markets’ Benjamin Reitzes said of the Bank’s comments on exports, “This is probably the most dovish part of the policy statement, and was likely the reason the C$ sold off.

“Competitiveness issues are become a hot topic once again and the BoC chimes in, but there’s little they can do on that front directly, while the market is focused squarely on a weaker loonie.”

The Bank also revised its call for real GDP growth in Canada, which TD Economics’ Brian DePratto said could be the most notable part of the press release.

“The range for 2017-2019 has been raised by roughly 0.4 percentage points,” DePratto said. “As a result, the Bank now sees the economy as having almost, but not quite reached its potential, rather than being at or slightly above it at the end of last year.”

Reitzes said the overall tone of today’s announcement was generally upbeat.

“While higher potential growth suggests GDP can run a bit hotter than previously, core inflation creeping higher and the labour market continuing to tighten point to higher rates ahead,” he said.

“We remain very comfortable with our call for the next hike to come in July.”

As of press time, the Loonie was trading at close to 79 cents U.S. – down almost eight-tenths of a cent since this morning’s announcement.

ecrawford@biv.com

@EmmaHampelBIV