Bank of Canada holds rates, says economic slowdown likely temporary

OTTAWA (Reuters) - The Bank of Canada held interest rates steady as expected on Wednesday, saying there was evidence that the slowdown was temporary but signaling it would remain on the sidelines as it monitors economic developments.

FILE PHOTO: Bank of Canada Governor Stephen Poloz arrives at a news conference upon the release of the Financial System Review in Ottawa, Ontario, Canada, May 16, 2019. REUTERS/Chris Wattie

The central bank left its overnight rate at 1.75% and repeated language that current rates remain “appropriate”. Inflation is expected to remain around the bank’s 2% target in coming months, it said.

On April 24, the bank cut its growth forecast for the first half of 2019 to 1.2% from 1.7% and removed wording about the need for future hikes.

“Recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased,” the central bank said in a statement.

The Canadian dollar fell to a five-month low of 1.3547 against the greenback before paring its decline.

“It certainly seems like the Bank of Canada is happy to remain on the sidelines for now, and wait to see if the economy does rebound as it expects,” said Royce Mendes, a senior economist at CIBC Capital Markets

Earlier this month, Statistics Canada said the economy added a record 106,500 jobs in April.

“Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary,” the statement said.

The Bank of Canada raised rates five times between July 2017 and October 2018. It has since stayed on the sidelines citing the economic challenges posed by high levels of household debt, low oil prices and trade tensions between the United States and China.

Though the bank was more optimistic on growth, it cited increasing global trade risks.

“The recent escalation of trade conflicts is heightening uncertainty about economic prospects,” the central bank said. “Trade restrictions introduced by China are having direct effects on Canadian exports.”

Since March, Chinese importers have stopped buying Canadian canola seed exports.

Canadian relations with China have chilled since Canada detained a senior Chinese telecommunications executive in December at the request of the United States. The United States is in the middle of difficult trade negotiations with the Asian powerhouse.

“The Bank seems increasingly worried about trade policies, in particular, the U.S.-China trade talks breaking down,” said Sal Guatieri, a senior economist at BMO Markets.

However, the bank said the easing of trade tensions with the United States should have a positive effect.

The United States this month lifted tariffs on Canadian steel and aluminum products, clearing the way for ratification of a new North American trade agreement.

Both of these developments will have “positive implications for Canadian exports and investment,” the bank said.

Furthermore, the Bank of Canada said the oil sector “is beginning to recover as production increases and prices remain above recent lows,” while the country’s housing market appears more stable nationally “albeit with continued weakness in some regions”.

Reporting by Kelsey Johnson and Steve Scherer; Additional reporting by Fergal Smith, Nichola Saminather, and Allison Martell in Toronto; Editing by Susan Thomas