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

Details released for controversial Cloverdale supportive housing project

Community reaction has been ‘unprecedented’: Cloverdale BIA

Suspected spill kills hundreds of crayfish, coho in Langley river

A fish kill in the Nicomekl has a biologist concerned for the health of the local ecosystem.

Surrey wants BNSF to slow Crescent trains

Mayor Linda Hepner said ‘it’s the least we can do’

WATCH: Cops for Cancer bring message of hope to Langley school

Young cancer survivors are traveling with the fundraising bike ride.

Rail-safety forum planned for White Rock this Friday

Event to include municipal, federal, provincial governments

B.C. RCMP turn to Const. Scarecrow to shock speeders into slowing down

New addition will watch over drivers from a Coquitlam median for first-of-its-kind pilot in Canada

B.C. home to 1/3 of Canada’s overdose deaths in first 3 months of the year

There were 1,036 overdose deaths in the first three months of the year, with 94 per cent accidental

B.C. candidate moves from hospice care to council race

He beat terminal cancer twice and entered hospice when he decided to run for council.

Canadian tobacco exec pushes back against vaping health concerns

A warning from Interior Health about the unknown health risks of vaping is getting a partial rebuke

New ‘meowyoral’ race featuring felines announced by B.C. animal shelter

Organizers hope the cat election will generate attention for shelter and local municipal election

Ministry of Agriculture commits $300,000 to help B.C. farmers obtain land

B.C. Land Matching Program supports access to affordable farmland for young farmers

Canadian air force short 275 pilots

Attrition outpaces recruitment and training claims Air Force

Teacher suspended after physically shushing, saying ‘shut up’ to student

Grade 5 student reported feeling ‘confused and a little scared’

Most Read