Bank of Canada holds interest rate for now, puts more focus on NAFTA

Bank of Canada said more hikes should be expected thanks to encouraging economic stats

The Bank of Canada’s decision to leave its interest rate unchanged Wednesday could be just a brief pause that comes as it carefully follows the unpredictable twists in the country’s trade talks with the United States.

The central bank kept its benchmark at 1.5 per cent, but many experts predict another increase could arrive as early as next month.

In a statement Wednesday, the Bank of Canada said more hikes should be expected thanks to encouraging numbers for business investment, exports and evidence that households are adjusting to pricier borrowing costs.

The bank, however, also made a point of saying it’s closely watching the renegotiation of the North American Free Trade Agreement and other trade policy developments, which could have negative impacts on the Canadian economy. It’s particularly concerned with the potential implications for inflation.

Last week, U.S. President Donald Trump announced he had reached a bilateral trade agreement with Mexico that would replace the three-country NAFTA. He put pressure on Canada to join the U.S.-Mexico deal, but after fresh talks restarted last week Ottawa and Washington have so far been unable to reach an agreement.

Trump notified Congress last Friday of his intention to sign a trade agreement in 90 days with Mexico — and Canada, if Ottawa decides to join them. If a deal can’t be reached, the president has also repeatedly threatened to impose punishing tariffs on Canadian auto imports.

READ MORE: Liberals won’t compromise on culture, dispute resolution in NAFTA talks: Trudeau

READ MORE: No deal yet as NAFTA renegotiation talks turn bitter at critical stage

Frances Donald, head of macroeconomic strategy for Manulife Asset Management, said the Bank of Canada’s explicit mention of NAFTA in Wednesday’s statement suggests the negotiations have become even more important around the governing council’s table.

“They’re sending a message that everything looks as planned… What that says to me is that an October rate hike is still certainly in play,” Donald said about the

However, she said the NAFTA reference gives the Bank of Canada options to possibly stay on hold next month, particularly if trade talks — and the outlooks for the economy and inflation — deteriorate.

Governor Stephen Poloz, she added, has been ”fairly agnostic” on the outlook for NAFTA. She said he’s pointed to potential negatives as well as positives, while the stressing everything is hypothetical until something is decided.

Benjamin Reitzes of BMO Capital Markets wrote in a note to clients that Wednesday’s statement makes it clear the NAFTA talks are biggest issue for markets and the Bank of Canada at the moment.

“There’s big time risk here, but most are still expecting a deal to get done,” Reitzes wrote as he referenced the apparent month-end deadline for NAFTA negotiations.

“Assuming all goes well with NAFTA (perhaps a big assumption) and the data over the next seven weeks, an October rate hike still looks like a reasonable expectation.”

Poloz has raised the rate four times since mid-2017 and his most-recent quarter-point increase came in July. The next rate announcement is scheduled for Oct. 24.

The Bank of Canada said Wednesday that the economy has seen improvements in business investment and exports despite persistent uncertainty about NAFTA and other trade policy developments.

“Recent data reinforce governing council’s assessment that higher interest rates will be warranted to achieve the inflation target,” the bank said as it explained the factors around its rate decision.

“We will continue to take a gradual approach, guided by incoming data. In particular, the bank continues to gauge the economy’s reaction to higher interest rates.”

The statement also pointed to other encouraging signs in Canada, including evidence the real estate market has begun to stabilize as households adjust to higher interest rates and new housing policies. Credit growth has moderated, the household debt-to-income ratio has started to move down and improvements in the job market and wages have helped support consumption, it said.

The bank can raise its overnight rate as a way to keep inflation from running too hot. Its target range for inflation is between one and three per cent.

Heading into Wednesday’s rate decision, analysts widely expected Poloz to hold off on moving the rate — at least for now.

Last month, Poloz stressed the need to take a gradual approach to rate increases in times of uncertainty. He made the remarks during a panel appearance at the annual meeting of central bankers, academics and economists in Jackson Hole, Wyo.

Andy Blatchford, The Canadian Press

Like us on Facebook and follow us on Twitter.

Just Posted

Quesnel archers score three golds at 55+ games

Stu Murray won two golds and Al Fleck won one in Cranbrook last week

Quesnel’s Terry Fox Run raises over $20,000

Local event had decent turnout and stellar fundraising results

Ministry of Transportation to hold info session on West Fraser Road washout

The meeting will take place at Buckridge Community Hall on Sept. 20

Lindsay Woods is running for Quesnel City Council

Woods was born and raised in Quesnel, and moved back recently

Baezaeko Complex fires no longer Wildfires of Note

The BC Wildfire Service has downgraded all local fires and disbanded incident management team

B.C. tent city ‘devastated’ after flash flood

Maple Ridge mayor says that residents shouldn’t have to return to their flooded tents

Syrian family can, finally, feel safe after settling in B.C.

Anglican Church of the Holy Trinity White Rock meets sponsored family for the first time

1st private moon flight passenger to invite creative guests

The Big Falcon Rocket is scheduled to make the trip in 2023, SpaceX founder Elon Musk announced at an event Monday at its headquarters near Los Angeles.

‘Game of Thrones,’ ‘Mrs. Maisel’ triumph at Emmys

In a ceremony that started out congratulating TV academy voters for the most historically diverse field of nominees yet, the early awards all went solely to whites.

Korean leaders meet in Pyongyang for potentially tough talks

South Korean President Moon Jae-in began his third summit with North Korean leader Kim Jong Un on Tuesday.

Russia blames Israel for plane shot down by Syrian missile

A Russian reconnaissance aircraft was brought down over the Mediterranean Sea as it was returning to its home base inside Syria, killing all 15 people on board.

Vancouver park board passes motion to learn Indigenous place names

The name of Vancouver’s Stanley Park is now up for debate as the city’s park board confronts its colonial past and pursues reconciliation.

Champ golfer from Spain killed in Iowa; suspect charged

Police said Celia Barquin Arozamena was found dead Monday morning at Coldwater Golf Links in Ames, about 30 miles north of Des Moines.

Trudeau upset after meeting with Saskatchewan chiefs

Trudeau is upset about how time was managed in a recent meeting

Most Read