Bank of Canada holds rates steady, pledges caution

Forex – Canadian Dollar Falls on Dovish Bank of Canada

Bank of Canada holds rates steady, pledges caution

The Bank of Canada left its key rate untouched at 1 % after its monetary policy meeting on Wednesday morning, a decision made in the face of stronger economic growth than expected in the first half of 2017, which should "moderate" in the second.

The bank says it expects Canada's economy to expand by 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019. The central bank sets rate policy to hit and maintain 2% inflation.

The guarded tone of the statement suggests the Bank of Canada could delay its next move, which many economists had expected would come in December or January.

The economy is running at close to capacity, with the output gap close to zero, but there still remains slack in the labour markets, which DePratto said showed there may be "room for more economic growth than the Bank is projecting without inflation rising materially above target".

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"Governing Council will be cautious in making future adjustments to the policy rate", according to the bank's press release. Growing protectionist pressures in the USA and competitiveness challenges could prompt Canadian firms to move production capacity overseas to offset the risk, the central bank said.

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

"This reinforces our view that rates aren't likely to go any higher in the near term", economist David Madani of Capital Economics said in a research note.

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.

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The decision comes amid a string of economic data that indicate Canadian economic activity has slowed after a stellar run in which the economy grew 3.7% in the 12 months to the end of the second quarter.

The moderation in growth is fueled in part by the rate rises. Because of high debt levels, household spending is likely more sensitive to interest rates than in the past.

He also cited global geopolitical unknowns and US fiscal and trade policies, including the renegotiation of the North American Free Trade Agreement. The "uncertainty around the outcome of NAFTA renegotiations is elevated", the bank said.

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