After a series of disappointing developments many experts are predicting it could be a while before the next interest rate increase by the Bank of Canada. (Photo by THE CANADIAN PRESS)

Bank of Canada holds interest rate, views oil slump as temporary soft patch

The bank is now projecting growth to be just 1.7 per cent in 2019, down from its October forecast of 2.1 per cent

The Bank of Canada left its trend-setting interest rate unchanged at 1.75 per cent Wednesday as the sharp decline in oil prices temporarily dims its economic outlook for the coming months.

Before long, however, the central bank expects the economy to expand with renewed vigour. More rate hikes, it stressed, will be necessary “over time.”

In its first policy announcement of 2019, the bank said the recent drop in crude prices will result in slower-than-expected growth in an economy that has otherwise been performing well.

The bank is now projecting growth to be just 1.7 per cent in 2019, down from its October forecast of 2.1 per cent — but it remains optimistic the economy will begin to strengthen again as early as the second quarter of this year.

“The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income,” the bank said in a statement.

“Looking ahead, exports and non-energy investment are projected to grow solidly… Indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1 per cent in 2020.”

The business-investment lift, the bank said, will get a boost from Ottawa’s recently announced tax changes to allow companies to write off a bigger share of the cost of new assets in the year they are purchased.

The big question, however, is what this will all mean for the pace of future interest-rate hikes.

Governor Stephen Poloz has been gradually raising the rate since mid-2017 to keep inflation from rising too high.

The timing of its next hike will depend on several factors, the bank said, and there will be a particular focus on developments in the oil markets, the Canadian housing sector and global trade policy.

The Bank of Canada has estimated it will no longer need to raise the rate once it reaches a “neutral” level of between 2.5 and 3.5 per cent.

“Governing council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” the bank said.

In addition to the oil slump, consumption and housing investment were underlined as weaker than expected in large part due to higher borrowing costs and stricter mortgage guidelines. But household spending is expected to continue to be supported by other factors, the bank said in its latest monetary policy report, also released Wednesday.

The bank listed these factors as population growth fuelled by immigration, low unemployment rates, cheaper gasoline prices and wage gains.

It also pointed to several areas of uncertainty — the persistence of the crude-price drop, the extent of its impact on non-oil-producing regions, how household spending adjusts to previous interest-rate hikes and tighter montage rules, and global trade developments such as the U.S.-China conflict.

The bank projects growth in the fourth quarter of 2018 to be 1.3 per cent, compared with its earlier prediction of 2.3 per cent. Growth is expected to be just 0.8 per cent over the first three months of 2019.

Canada’s sharp deceleration in wage growth since last spring has also been highlighted by experts as a concern for the economy — particularly since the tightened labour market should translate into higher wages.

The bank addressed the issue Wednesday by saying national wage-growth figures have been weighed down by weaker numbers in the oil-producing provinces. The rest of the country has shown a steady level of wage growth in recent years and the bank remains hopeful it will pick up its pace.

The bank estimates the oil slump, which began last summer and has seen prices recover in recent weeks, will reduce the level of Canada’s gross domestic product by 0.5 per cent by the end of 2020. The economic impact of the decline is expected to be about one-quarter as large as the 2014-16 oil-price shock, the bank said.

Like us on Facebook and follow us on Twitter.

Just Posted

Fraser Valley Thunderbirds finish second in Acura Winter Classic tournament

Several Chilliwack skaters lead the way as the B.C. Minor Midget Hockey League squad rolls into 2019

Chilliwack Players Guild brings first ever radio play to stage

An Affair of Honour is based on a true story, written by the father of a Chilliwack man

Chilliwack school board plans for an integrated arts school for grades 8-12 at old UFV location

With $10 million from B.C. government, SD 33 has big plans for old UFV campus at 45635 Yale Road

Relationships, continuity top health-care concerns for Agassiz residents

Feedback during Fraser Health events showed access to health care needs to improve

More staff being hired at Fraser Valley seniors homes

Number of care hours for residents lags behind provincial targets

Giant rotating ice disk forms in Maine river

Ice disk that is roughly 100 yards wide has formed in the Presumpscot River

Razor burn: Gillette ad stirs online uproar

A Gillette ad for men invoking the #MeToo movement is sparking intense online backlash

Lower Mainland teacher resigned after ‘inappropriate discussions’ with elementary students

Tracy Joseph Fairley resigned from Maple Ridge-Pitt Meadows district April 23, 2018

Feds poised to bolster RCMP accountability with external committee

Long-anticipated move is the latest attempt at rebuilding the force following years of sagging morale

Canada needs a digital ID system, bankers association says

The Department of Finance last week officially launched its public consultation on the merits of open banking

Surrey needs 350 more cops, activist tells council

‘Right now we are 350 police behind what our population requires,’ politicians are told

Indigenous energy summit includes session on pipeline ownership options

Steven Saddleback of the Indian Resource Council says a session will feature presentations on financing models

Japanese grand champion Kisenosato retires from sumo

The 32-year-old Kisenosato was the first Japanese-born wrestler in 19 years to gain promotion to sumo’s highest rank

UPDATE: Accused B.C. high school killer found fit to stand trial

Gabriel Klein is accused in the 2016 stabbing death of Letisha Reimer at Abbotsford Senior Secondary

Most Read