Interest Rate in Canada

Canada - Interest Rate

Bank of Canada leaves rates unchanged, adopts more dovish stance

On 6 March, the Bank of Canada (BoC) left its target for the overnight rate unchanged at 1.75%, as widely expected by market analysts.

The decision to hold was reinforced by a sharp slowdown in economic growth and subdued inflation, which was 0.5 percentage points below the 2.0% target in January due to the sharp fall in oil prices. According to the Bank, inflation will likely remain below target for much of 2019, as temporary factors such as lower energy prices and a widening of the output gap are expected to drag on prices. Moreover, the weakening global growth backdrop, mainly driven by trade headwinds, also influenced the Bank’s decision.

Going forward, the Bank will likely stand pat in the first half of this year amid depressed economic activity, a weak energy sector and muted inflationary pressures. In its communiqué, the BoC adopted a more dovish tone, highlighting “increased uncertainty about the timing of future rate increases” and dropping a previous pledge to raise the policy interest rate to a neutral range. However, the language used did not entirely remove the possibility of raising rates.

Commenting on the BoC’s decision, Brian DePratto, senior economist at TD Economics, noted:

“Near-term economic softness, elevated uncertainty, the clear near-term bias to holding rates, and the likelihood that the neutral interest rate is below the Bank of Canada's estimates all point in the same direction. Unless we see a robust growth recovery mid-year (with that hurdle rising by the day) further rate hikes in 2019 are all but off the table.”

The Bank’s next monetary policy announcement is scheduled for 24 April.

Last month, our analysts saw the target for the overnight rate ending 2019 at 2.11%. For 2020, analysts expected the target for the overnight rate to end the year at 2.18%. A new Consensus Forecast will be published on 26 March, and panelists are likely to downgrade their projections in light of the recent policy meeting.