Bank of Canada Expected to Stand Pat Amid Trade Uncertainty
By Kim Mackrael
OTTAWA -- The growing uncertainty over Canada's trade ties with the U.S. is reinforcing expectations that the Bank of Canada will hold its benchmark interest rate steady in its policy announcement Wednesday.
Economists from 10 of the 11 primary dealers of Canadian government securities told The Wall Street Journal they anticipate the Bank of Canada will keep the key rate at 1.25% this week. While many expect at least two interest-rate increases later in the year, several acknowledged their forecasts could be in doubt if trade relations worsen.
The 11th primary dealer, HSBC Canada, didn't participate in the survey.
Wednesday's rate decision comes less than a week after U.S. President Donald Trump announced plans for global tariffs on steel and aluminum, blindsiding Canadian officials and stoking fears of a possible trade war. Meanwhile, efforts to renegotiate the North American Free Trade Agreement, or Nafta, have made limited progress. Canada sends about three quarters of its exports to the U.S., so any disruption in trade flows between the two countries would have a significant impact on the Canadian economy.
BMO Capital Markets is one of several firms forecasting two more rate increases later this year. "Given what's unfolding in trade, there's a clear risk there might actually be less than that," chief economist Doug Porter said. "I'm not too worried about the upside, I'm more worried about the downside to the rate call at this point."
After raising the key rate by a quarter percentage point in January -- the third such increase since mid-2017 -- the central bank said Canada's economic outlook likely would warrant higher interest rates over time. However, it said it would take a cautious approach to increases, citing uncertainty over Nafta and worries about soaring household debt.
Canada's economic outlook has faced several setbacks since then. A series of strong employment reports came to an end with January's jobs data, which saw the economy drop a net 88,000 jobs. Canada's gross domestic product came in below market expectations in the fourth quarter, and a Statistics Canada survey released last week suggests business investment could slow considerably this year, led by a pullback in the country's energy sector.
"At risk is the Bank of Canada's story that we had cause to be more optimistic because we were seeing the rotation away from excess reliance on the household sector and towards more encouraging evidence on the export and investment side of the picture," Bank of Nova Scotia economist Derek Holt said.
He said he doesn't expect much additional guidance from the central bank during its announcement this week.
"There's so much uncertainty hanging in the air that I think [the central bank] will want to make this one largely a maintenance statement and not rock the boat too much in either direction," Mr. Holt said.
This week marks the first time the Bank of Canada will provide an update on the country's economic outlook after issuing an interest-rate decision that isn't accompanied by a monetary policy report. Bank of Canada deputy governor Timothy Lane will deliver an economic progress report in a speech in Vancouver, British Columbia, on Thursday.
Write to Kim Mackrael at email@example.com
(END) Dow Jones Newswires
March 06, 2018 10:43 ET (15:43 GMT)Copyright (c) 2018 Dow Jones & Company, Inc.