Financial Post | December 5, 2018 | by Kevin Carmichael
The negatives outweigh the positives in the Bank of Canada’s new statement, a shift from October
Canada’s central bank took a break from raising interest rates on Dec. 5. The pause could last longer than many were expecting, mostly because policy makers are worried that the energy industry’s contribution to economic growth will be “materially weaker” than expected only a couple of months ago.
The acute weakness in Canadian oil prices hasn’t yet knocked the central bank off course. The Bank of Canada said in its latest policy statement that it continues to think that borrowing costs will need to rise to a “neutral range” if it is to stay ahead of inflation. Policy makers estimate that the neutral rate at which monetary policy is neither helping nor impeding economic growth is between 2.5 per cent and 3.5 per cent. The current benchmark target is 1.75 per cent, so there is a way to go.
But recent developments suggest a weaker economy will curb inflation, alleviating the need for the central to add an additional headwind. The negatives outweigh the positives in the Bank of Canada’s new statement, a shift from October, when Governor Stephen Poloz and his deputies on the Governing Council raised interest rates a quarter point.
The news since then mostly has been negative. Policy makers observed that indicators suggest that Canada’s economy had “less momentum going into the fourth quarter,” that U.S. President Donald Trump’s trade wars are “weighing more heavily on global demand,” and that oil prices “have fallen sharply.” They also noted that new estimates of gross domestic product show the economy is smaller than previously thought. That means there could be less pressure to raise interest rates.
“Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth,” policy makers said, adding that they will make a final determination when they update their economic outlook in January.
The latest assessment of the state of play by Canada’s central bankers wasn’t entirely dreary. They expressed confidence that non-energy investment would “strengthen” in the months ahead. Oil notwithstanding, data suggest industrial companies are struggling to keep up with new orders and will need to add capital if they want to grow. The signing of the new North American trade agreement makes the future more certain, and the Trudeau government’s promise to cut taxes on investment and reduce regulation should make Canada more competitive, the central bank said.
Still, the Bank of Canada is more cautious than it was a few weeks ago. It concluded its statement by saying the pace of interest-rate increases will be determined by a “number of factors,” including the effect of higher borrowing costs on spending, the trade wars, the “persistence” of the oil-price shock, and the central bank’s “assessment of the economy’s capacity.”
That’s a longer list than last time.