The Bank of Canada said the path of interest rates would be determined by its ongoing assessment of the data. It meant it.
Governor Stephen Poloz and his deputies on the central bank’s Governing Council opted to leave the benchmark interest rate unchanged at 1.75 per cent on Jan. 9. No one who pays attention to these things expected otherwise.
You probably heard grumbling from Bay Street in December, when the central bank also left borrowing costs unchanged, and abruptly adopted a more a skeptical tone about Canada’s economic outlook. The complainers instead might have expressed relief that the central bank is willing to risk embarrassment, rather than stick with an outlook that no longer was supported by facts.
The Bank of Canada shifted last month because oil prices were significantly lower than expected, and because Statistics Canada had discovered that gross domestic product was considerably smaller than previously thought. Those two factors figured prominently in a revised economic outlook that will harden expectations that the snow will have melted before the central bank resumes raising interest rates.
Policy makers also introduced a heightened level of concern over weaker-than-expected household spending and real-estate activity, dropping its outlook for economic growth in 2019 to 1.7 per cent from an October estimate of 2.1 per cent. That’s slower than the economy’s non-inflationary speed limit, suggesting less pressure to lift borrowing costs.
“Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range,” which is thought to be between 2.5 per cent and 3.5 per cent, the central bank said in its new policy statement. “The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy.”
Overall, the Bank of Canada feels good about the economy. In its new quarterly economic report, it anticipates stronger export growth than “recent historical experience,” as companies take advantage of decent global demand and new trade agreements. Policy makers predicted “robust” business investment outside the energy industry, and they assume that low unemployment, elevated immigration and decent wage growth will power the economy through the current slow patch.
“The Canadian economy has been operating near capacity for over a year now,” policy makers say in the January Monetary Policy Report. “In addition, job growth has been strong, the unemployment rate is at a 40-year low and inflation is close to target. The main changes to the outlook result from developments in oil markets.”
In January 2015, the Bank of Canada cut interest rates as oil prices tumbled. This time is different. The oil industry is significantly smaller than it was then, and the price drop has been less severe. The central bank estimates that the overall effect of last year’s developments will be a quarter of the size of the blow the economy absorbed from the 2014-15 price collapse.
That’s still “material,” the central bank said, adding that it expects energy investment will “weaken further.” As a result, GDP will be 0.5 per cent lower by the end of 2020 than it might have been otherwise, the Bank of Canada said.
Depressed conditions in the oil producing provinces explain why national wage growth is decelerating, officials said. They also explain why household spending and real-estate investment have slowed more than the central bank anticipated, but only partially. The central bank indicated that the combination of higher interest rates and stricter mortgage rules could be squeezing demand by a greater degree than expected.
Policy makers said they would pay extra attention to housing in the months ahead, as it’s difficult to discern how much of the decline represents a retreat by speculators, and how much of it is a shift in fundamental demand. If it’s the latter, the central bank could be persuaded to delay its next interest-rate increase, as it would suggest that Canada’s indebted households are extra-sensitive to higher borrowing costs.