BOC leaves interest rate unchanged but maybe not for long

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BOC leaves interest rate unchanged but maybe not for long

The "notable shift" toward protectionist trade policies is the "most important source of uncertainty" for the Bank of Canada's outlook.

The Bank of Canada has made a decision to keep its benchmark interest rate steady at 1 per cent. But currency traders were caught a little by surprise - the Canadian dollar lost more than half a cent to trade at 78.34 cents United States within seconds of the bank's decision coming out. By late morning, the loonie was trading at 78.22 cents (U.S.). While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate.

Canada's economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors.

The bank has already hiked its rate twice this year - once in July and then again last month. "Because of high debt levels, household spending is likely more sensitive to interest rates than in the past".

The moderation in growth is fueled in part by the rate rises.

Meanwhile, the bank is ratcheting up its concern about the Trump effect on Canada's export-dependent economy.

But the bank said it has chosen not to fully quantify the potential damage to Canada's economy and export prospects until it has more clarity about what will happen.

While growth of just 1.5 per cent two years from now isn't an optimistic view, forecasting that far into the future always has to come with a grain of salt.

Growth is projected to expand by 3.1 percent in 2017, 2.1 percent in 2018, and 1.5 percent in 2019. Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates.

The bank highlighted the risk that US trade protectionism could drive firms to boost offshore production, hurting exports and business investment.

The Bank of Canada held interest rates steady on Wednesday, as expected, even as it said the economy was at or near full capacity, signaling it was willing to let the economy run a little bit hot amid uncertainty over NAFTA renegotiations. The central bank sets rate policy to hit and maintain 2% inflation.

But one area of economic slack lies in the labour market where long-term unemployment remains high and average hours worked and wage growth remain low.

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