OTTAWA – The Bank of Canada held its trend-setting interest rate at one per cent on Wednesday as it said there needs to be continued growth in Canada’s exports before companies increase their investment and hiring.
The central bank also noted activity in the housing market is stronger than previously thought.
“While an increasing number of export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring,” the Bank of Canada said in its latest statement.
“Meanwhile, activity in the housing market has been stronger than anticipated. The bank still expects excess capacity in the economy to be absorbed during the next two years.”
Economists had widely expected the central bank to make no change to the overnight rate, which has been set at one per cent for nearly four years.
Inflation continues to hover around two per cent, which the central bank said is just as it expected back in July when it released its last monetary policy report.
“Recent data reinforce the bank’s view that the earlier pickup in inflation was attributable to the temporary effects of higher energy prices, exchange rate pass-through, and other sector-specific factors rather than to any change in domestic economic fundamentals,” it said.
But while the risks for inflation remain, in its words, “balanced,” the central bank said the risks associated with household debt have not gone away.
“The balance of these risks is still within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at one per cent,” the central bank said.
Economists had expected a mostly dovish monetary policy report.
“The slightly stronger GDP readings are unlikely to lead the bank to alter its mid-2016 output gap closure particularly amid weak domestic employment readings … along with weak global economic readings,” BMO deputy chief economist Michael Gregory wrote in a note to investors ahead of the Bank of Canada’s announcement.
“This double-whammy of weak readings likely offsets the continued resiliency of housing activity from the bank’s risk management perspective.”
On the global front, the Bank of Canada said the economy is performing largely as expected. Europe’s recovery seems to be “faltering,” it says, while the United States is still on the comeback trail, thanks in part to stronger business investment.
“Global financial conditions remain very stimulative and longer-term bond yields have eased even further,” the central bank said.
The Bank of Canada’s next rate announcement is set for Oct. 22 when it is also expected to publish an update to its monetary policy report.