Unbiased

As expected, the Bank of Canada kept its target interest rate unchanged at 1.75 percent after today's Governing Council meeting.  The Monetary Policy Report (MPR) that was also released today removes the reference to an underlying tightening bias that has been in place for the past two years, suggesting that rates will remain on hold for the foreseeable future.

Governor Stephen Poloz's statement introducing the MPR focused on the headwinds that the economy is now facing.  Poloz noted that the growth slowdown experienced in the final months of 2018, not just in Canada but also elsewhere in the world, had been widely expected, given the waning impact of the Trump administration's tax cuts.  However, the slowdown has proved more persistent than forecast, a development which Poloz attributes to Trump-inspired trade conflicts, which show no sign of easing.

Turning to headwinds specific to Canada, Poloz noted four distinct areas of uncertainty.  First, the outlook for the oil sector remains subdued.  While oil prices have shown signs of recovery, there are severe difficulties in moving Western Canadian product to market, given the effective freeze on pipeline construction and the limited availability of rail alternatives. It is not clear that the recent election of a more industry-friendly government in the Province of Alberta will make any difference here.

Second, there are trade issues specific to Canada.  There are serious doubts about whether CUSMA, the proposed NAFTA replacement, can make it through the Democrat-held House of Representatives.  In the meantime, Canada's export performance remains weak, something Poloz admits the Bank does not entirely understand.

Third, the Bank continues to pay close attention to the housing market. The overheating previously seen in Toronto and Vancouver has abated, but markets in other urban centres are still performing well.  If the Toronto and Vancouver markets stabilize and recover, the overall national picture would naturally improve, which would eventually give the Bank more leeway to resume its tightening cycle.

Finally, Poloz noted recent fiscal policy developments.  While the Federal budget and budgets in some Provinces continued to provide stimulus, the recent Ontario budget was more restrictive.  In effect, Ontario's planned spending cuts fully offset the fiscal boost provided by other governments, leading the Bank to lower its overall growth forecast by 0.2 percentage points.

The Bank still considers that its policy settings remain below a neutral rate, which it estimates at 2.25-3.25 percent.  While it does not anticipate a recession, it now sees the need to maintain its current rate stance for as long as may be needed to offset the international and domestic headwinds and get the economy back to a trend rate of growth. Given the diverse range of negative influences Poloz identified today, rates seem set to remain on hold well into 2020.