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MNI POLICY: BOC Holds Rate, Drops Appropriate as Growth Slows>
By Greg Quinn and Anahita Alinejad
OTTAWA (MNI) - The Bank of Canada held its key interest rate at
1.75%, dropping a phrase about borrowing costs being appropriate to say
it's watching for signs that slower-than-expected growth will persist.
Geopolitical and trade tensions remain high and may be spreading
into Canada's resilient domestic economy, adding slower job growth and
consumer spending to already shaky investment and exports. The slowdown
that started in the fourth quarter will extend into the first quarter of
this year and move the economy away from full output, the Ottawa-based
BOC said Wednesday.
"In determining the future path for the Bank's policy interest
rate, Governing Council will be watching closely to see if the recent
slowdown in growth is more persistent than forecast," the Governing
Council led by Stephen Poloz said in a statement from Ottawa.
While Poloz continued his practice of avoiding direct guidance on
rates, dropping the appropriate phrase takes out a major barrier to a
reduction later this year. Today's language contrasts with December
comments that the economy was near full output and policy makers had no
reason to match Fed cuts even as Canada ended up with the G7's highest
The decision matched the MNI economist median for no change. MNI's
PINCH model showed investors earlier this week saw a 20% chance of a
rate cut by April, as weakness in the global economy drags Canada down.
Fourth-quarter GDP growth will come in at a 0.3% annualized pace
instead of the earlier estimate of 1.3%, the BOC said. While that will
rebound to 1.3% in the first quarter, on average the expansion over that
period is three-quarters of a percentage point less than expected.
"Some of the slowdown in growth in late 2019 was related to special
factors that include strikes, poor weather, and inventory adjustments.
The weaker data could also signal that global economic conditions have
been affecting Canada's economy to a greater extent than was predicted,"
the BOC said.
Growth for all of this year will come in at 1.6%, close to the
October projection of 1.7%, and 2021 growth was raised to 2% from 1.8%.
Canada's economy has been "resilient" amid global trade and geopolitical
tensions, the BOC said. Inflation risks are balanced and price gains
will remain near its near its 2% target through 2021.
Policy makers still pointed to more than half a dozen signs of
weakness including a buildup of business inventories, comments balanced
against solid consumer spending supported by tax cuts and population
growth. The BOC also scaled back mentions of high household debts and
overheated housing markets that argued against rate cuts.
"The effects of global trade conflicts and elevated uncertainty may
have spread beyond investment and exports, contributing to the
slowdown in the labor market and weighing on confidence. This may have
contributed to more cautious behavior by households," the BOC said.
The economy "until recently, has been operating close to capacity,"
and "the output has widened in recent months," the BOC said. The
forecast paper estimated the output gap is now between -0.25% and
-1.25%. In October the gap's range was 0% to -1%.
The BOC's December statement said the policy rate remains
"appropriate" in an economy near full potential and inflation expected
to hold at the BOC's 2% target.
--MNI Ottawa Bureau, +1-613-314-9647, firstname.lastname@example.org
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