The Bank of Canada (BoC) today decided to hold its key benchmark overnight rate at 1.75%. Governor Stephen Poloz is one of the few central bankers that is resisting the global direction toward easier monetary policy by not cutting his central bank rate. The rate is unchanged now for their ninth announcement meeting in a row, since October of 2018. This leaves Canada with the highest policy bank rate among the advanced economies of the world.
Two significant reasons seem to justify the BoC stand on their rate:
1.) It appears that the economy has been running near capacity, because elemental price pressures seem to have been steady, on target for over a year now.
2.) Canada has some of the highest household debt levels in the world. This has restrained the BoC to cut further for fear of encouraging even more borrowing.
The BoC has a careful & delicate task ahead to balance risk. With the economy near its capacity, they would need a clear indication of downside risks to the global economy in order to lower the key rate. An example of this would be a complete breakdown of trade talks internationally or some other evidence that Canada’s economy develops domestic problems, i.e. productivity issues, oil prices or taxes.
Third quarter economic data for Canada showed that annualized growth slowed to 1.3%. Exporters struggled, offset by a pick-up in consumption, housing and business investment. The BoC believes that business investment and exports will recover causing growth over the next two years. We believe this to be too optimistic given Canada’s tax regime and reliance on natural resource exports.