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  • KPB & Co Research

The Bank of Canada today, outlined that its key monetary policy rate will be kept unchanged in July-2019 as a means to keep the lid on the spill-over effects of greater global trade tensions. This halt in rate hikes is the third consecutive hold on rates since growth concerns surfaced in late 2018. The target rate for overnight lending was held at 1.75%, the bank rate was kept at 2%, and the deposit rate at 1.5%. The Bank also noted the distinct possibility that rates may be reduced if economic growth and or trade tension deteriorate further beyond what has already happened.

In the Bank's monetary policy statement, they spoke to the impact that raising trade tensions have been having on firm's and investor appetite to make investments is risk assets, and the outlook for commodity prices. The Bank noted that:

... in light of weaker sentiment and activity in major economies. Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices.

On the positive side, the Bank also noted that the response by Central Banks in the USA and Europe has cushioned the blow from the uncertainty coming from tensions in trade. Central Banks in the USA and Europe have become more accommodative in the face of growing signs that the steam has been running out of the global growth engine. According to the Bank:

Policy is responding to the slowdown: central banks in the US and Europe have signalled their readiness to provide more accommodative monetary policy and further policy stimulus has been implemented in China. ... The Bank now expects global GDP to grow by 3 percent in 2019 and to strengthen to around 3 1/4 percent in 2020 and 2021, with the US slowing to a pace near its potential. Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks.

Outlook For Canadian Economy

The Bank of Canada is poised to lower rates should economic conditions in Canada soften further, however all indications are that the Bank expects the economy to strengthen as the year unfolds. Growth is expected to strengthen on account of a few things:

  1. Increase in oil production
  2. Reversal of weather related slowdowns in early 2019
  3. Strong labour market conditions
  4. Stability in the housing market
  5. Recovery in exports

With consideration given to the 5 factors supporting stronger growth, the Bank expects real GDP growth for Canada to hover at around 1.3% in 2019, and at about 2% in 2020 and 2021. While there are indications of stronger inflationary pressures due to food and automobile prices, the Bank expects CPI inflation to decline in 2019 due to lower gasoline prices and other temporary factors. Over the near to medium terms inflation is expect to track the 2% target.

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