Bank of Canada holds interest rate at 1.75%, wary of global slowdown

The Bank of Canada maintained its target overnight interest rate at 1.75 per cent Wednesday, as widely expected by analysts.

Yet Governor Stephen Poloz said Canada has "not been immune" to the effects of a global economic slowdown.

In his opening statement during a meeting with members of the media, Poloz said the "worsening global situation" is the primary issue for the Canadian economy.

"Economic forecasts have been marked down further in most countries, largely as a consequence of the escalation of trade actions and uncertainty around what may be next," he said.

"Heightened uncertainty about future trade policies is directly reducing business investment, and there is a risk that this will spread to households as well."

In a written statement about the decision and its latest Monetary Policy Report, the central bank said "the outlook for the global economy has weakened further" since its last report in July.

"Ongoing trade conflicts and uncertainty are restraining business investment, trade and global growth," the bank said.

As a result, it expects to find that economic growth has slowed in this second half of 2019.

The bank said it projects that the Canadian economy will grow by 1.5 per cent this year, 1.7 per cent in 2020 and 1.8 per cent in 2021.

The loonie began falling at the time of the announcement, declining as much as 0.88 per cent to 75.72 cents US. At around 5 p.m. ET Wednesday it was trading at 75.99. 

"Rate cuts are most definitely on the table," said Brian DePratto, senior economist for TD Economics, in a written statement about the rate decision. "After election-induced radio silence, the Bank of Canada came back to life with a notably cautious take on current events.

"When your statement includes a view that further contractions in investment and exports are likely, and that the economy will be 'increasingly tested,' it would seem to suggest that the possibility of monetary easing is top of mind."  

Josh Nye, senior economist for RBC Economics, said the "dovish policy statement boosted market odds of a rate cut in the first half of 2020."

Despite the bumps resulting from the global picture, the bank said government spending and lower borrowing rates have supported domestic demand, and activity in the service sector remain robust.

Some other positive signs for the economy include employment growth that shows continued strength as well as wage growth, albeit with "some variation among regions" — notably the resource-dependent provinces where the economy and employment still lag.

Also, housing activity is picking up in most regions, the bank said.

The bank's governing council found it appropriate to maintain current interest rates, but "is mindful that the resilience of Canada's economy will be increasingly tested as trade conflicts and uncertainty persist."

The next scheduled announcement on interest rates is Dec. 4.