Bank of Canada opens door to rate cut as growth outlook worsens

OTTAWA (Reuters) - Canada’s central bank held interest rates steady as expected on Wednesday, but left the door open to a possible cut over the coming months to help the economy weather the damaging effects of global trade conflicts.

FILE PHOTO: A jogger runs past the Bank of Canada building in Ottawa, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie

The Bank of Canada cut domestic and global growth forecasts but maintained its benchmark rate at 1.75%. It said the current level of stimulus remained appropriate but that the country’s economy will “be increasingly tested as trade conflicts and uncertainty persist.”

“(We) considered whether the downside risks to the Canadian economy were sufficient at this time to warrant a more accommodative monetary policy as a form of insurance against those risks,” Bank of Canada Governor Stephen Poloz told reporters. “We concluded they were not.”

Trade tensions were restraining business investment while helping to cut commodity prices, the bank said.

The Canadian dollar, the top performing G10 currency this year, declined to a near two-week low at 1.3210 to the U.S. dollar, or 75.70 U.S. cents, after the rate decision.

Chances of a rate cut in December rose to 25% from 15% before the policy announcement, money market data showed.

Canada’s central bank has remained firmly on the sidelines since October 2018, opting to hold steady even as its counterparts, including the U.S. Federal Reserve, have eased.

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The Fed cut its benchmark rate as expected on Wednesday, to a range of 1.50% to 1.75%, to help the U.S. economy weather a global trade war without slipping into a recession, but signaled it was on hold.

The move marked the first time the U.S. policy rate has been below the Bank of Canada’s equivalent since December 2016.

Analysts said the bank’s tone was softer than anticipated.

“This reads dovishly,” said Andrew Kelvin, chief Canada strategist at TD securities. “I think the market reaction has this right.”

Poloz said the bank had studied whether the insurance provided by a cut might trigger higher financial vulnerabilities as well as economic and inflationary consequences. Canada’s inflation is, and is expected to stay near, the bank’s 2% target.

No such cut was considered in September, Poloz said during a news conference, although “certainly we could see which way the winds were blowing.”

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The bank revised its 2019 Canadian growth projection upwards to 1.5% from 1.3%, while reducing its 2020 and 2021 forecasts to 1.7% from 1.9% and 1.8% from 2.0%, respectively because of weaker foreign demand, trade uncertainty and lower government spending in Alberta, the country’s main oil-producing province.

Poloz said the Canadian dollar has remained steady against its U.S. counterpart, but has appreciated against other currencies. “It’s on these margins people are mentioning it’s a little harder to compete.”

BMO’s chief economist Doug Porter said in an interview “it’s pretty clear” the central bank is worried about global trade, adding it “gave a number of hints they would be prepared to move if things deteriorate at all in the months ahead.”

The bank said it would monitor “the extent to which the global slowdown spreads beyond manufacturing and investment” going forward while watching consumer spending, housing activity and fiscal policy developments.

But Poloz cautioned there are limits to its actions. “Tariff and trade restrictions will work over time to permanently reduce potential output everywhere, while raising the prices of consumer goods,” Poloz said. “Monetary policy can only do so much about these elements of shock.”

Reporting by Kelsey Johnson, Additional reporting by Fergal Smith, Moira Warburton and Jeff Lewis in Toronto, Editing by David Ljunggren, Steve Orlofsky, Bill Berkrot and Tom Brown