The Bank of Canada is feeling pretty good about the economic outlook, all things considered.
Policy makers left the benchmark interest rate unchanged at 1.75 per cent on May 29, noting that the escalation of Donald Trump’s trade war with China “is heightening uncertainty about economic prospects.”
The decision to leave borrowing costs unchanged was expected. So was the expression of worry about a new round of tit-for-tat tariffs between the world’s largest economies. Canada’s non-energy exports already were weak. Anything that hurts global demand, or makes it more difficult for Canada’s relatively uncompetitive exporters to find new markets, would deny the economy a lift from international sales.
“The degree of accommodation being provided by the current policy rate remains appropriate,” the central bank said in a statement.
Aside from trade, policy makers say the world is unfolding much as they expected last month, when they slashed their forecast for economic growth in the first quarter to an annual rate of 0.3 per cent, while predicting a jump to a rate of 1.3 per cent in the current quarter.
The central bank said there is “accumulating evidence” that the slump at the end of 2018 and early 2019 was temporary.
Poloz and his deputies on the Governing Council were gradually taking interest rates higher last year when the economy hit a wall. Oil and real-estate prices plunged in fourth quarter and household spending sputtered. Policy makers retreated to the sidelines, unsure if the economy was ready for higher interest rates.
They remain unsure, as there is no indication in the new policy statement that policy makers are ready to resume their path back to a more normal interest-rate setting.
But there is nothing that indicates that an interest-rate cut was on the table over the past couple of weeks as the Governing Council assessed the outlook.
That could surprise some people. Prices of assets geared to short-term interest rates suggest that some investors are betting that economic conditions will force interest rates lower this year. The central bank doesn’t appear to see things going that way.
“Overall, recent data have reinforced Governing Council’s view that the slowdown in 2018 and early 2019 was temporary, although global trade risks have increased,” the statement said.
Policy makers said the oil sector is “beginning” to recover and that weakness in the housing appears to be isolated to a few regions. Consumer spending and exports appear to have picked up, and “overall business investment has firmed,” the statement said.
And then there are those impressive hiring numbers. The data are volatile, but the central bank has concluded that companies wouldn’t be taking on new workers at this rate if the economy was going off the rails.
“Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary,” the statement said.
Copyright Postmedia Network Inc., 2019
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