OTTAWA (Reuters) - The Bank of Canada held interest rates steady on Wednesday as expected but removed wording around the need for future hikes and lowered its growth forecast for 2019, cementing the market’s view that further increases are off the table for now.
Governor Stephen Poloz, speaking to reporters after the decision, said the central bank had shifted to a position of watching and waiting. He did not rule out the chance of a rate cut.
“If there was a new negative disturbance, that would be something that we’d consider as fodder for whether interest rates need to be revised down,” Poloz said.
He made clear, however, that the central bank believes rates are where they should be, considering its more optimistic outlook for the economy later in 2019 and onward, adding “we need some positive data to actually confirm that this outlook is the appropriate one.”
The Bank of Canada held rates steady at 1.75 percent on Wednesday. It has increased rates five times since July 2017, but has stayed on the sidelines in its last four decisions.
The central bank now expects economic growth in the first half of 2019 to be lower than anticipated in January, when it released its last monetary policy report, due to a slowdown in Canada’s oil sector, the negative impact of global trade policies and a weaker-than-expected housing sector.
It lowered its gross domestic product (GDP) growth forecast for the year to 1.2 percent from 1.7 percent in January, and said it was monitoring the impact of developments in household spending, oil markets and global trade.
“This reads dovish,” said Andrew Kelvin, senior rates strategist at TD Securities. “This just sounds like a central bank that is coming to grips with the fact that 1.75 percent will be the top of this policy cycle.”
Despite the gloomy revisions, the central bank said it still expects growth to pick up in the second half of 2019, as housing activity stabilizes and consumer consumption is underpinned by growth in employment income.
“Given all these developments, the Governing Council judges that an accommodative policy interest rate continues to be warranted,” it said in a statement. There was no repeat of the language in the March 6 statement, which referred to “the timing of future rate increases.”
The Canadian dollar hit more than a three-month low at 1.3522 to the U.S. dollar after the decision on Wednesday, while money markets were pricing in more than a 60 percent chance of a rate cut by year end.
“Can the possibility of a rate hike this year be ruled out? I think so,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets. “It would take a meaningful positive surprise at this point, which doesn’t seem likely.”
While the Bank of Canada’s overall tone was more dovish than in previous releases, it continued to call for the Canadian economy to gradually strengthen through 2019, and then grow above potential in 2020 and 2021, absorbing the modest degree of excess capacity that has emerged this year.
The overall inflation rate, meanwhile, is expected to dip in the third quarter before recovering to around 2 percent, the midpoint of the central bank’s 1 percent to 3 percent target range. It said inflation should remain around 2 percent through 2020 and 2021.
Still, Poloz remained cautious, not committing to a hike nor a cut as the next move.
“If everything turns out perfectly, there’s no rush to suddenly get back in the saddle,” he said.
The Bank of Canada also revised down its estimate for the neutral range to 2.25 percent to 3.25 percent from 2.5 percent to 3.5 percent, citing additional information and improved modeling. A neutral range is when rates neither stimulate nor restrain growth.
Additional reporting by David Ljunggren and Steve Scherer in Ottawa and Fergal Smith, Allison Martell and Nichola Saminather in Toronto; Editing by Paul Simao