Bank of Canada content to leave rates unchanged, frets about trade war damage

OTTAWA (Reuters) - The Bank of Canada held interest rates steady as expected on Wednesday and made clear it had no intention of easing monetary policy, while highlighting the risks trade wars posed to the global economy.

FILE PHOTO: A jogger runs past the Bank of Canada building in Ottawa, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie

The central bank, which has sat on the sidelines since last October amid an economic slowdown, maintained its overnight rate at 1.75% and made no mention of future rate moves.

By contrast, the Federal Reserve is expected to cut benchmark U.S. interest rates as soon as the end of July. Traders had bet the Bank of Canada would not follow suit, helping push the Canadian dollar to near eight-month highs against the greenback.

Bank of Canada Governor Stephen Poloz said the bank was comfortable with its current stance given the domestic economy’s recovery from a series of challenges.

“So until such time as those headwinds worsen or dissipate, then we are content with today’s setting of interest rates,” he told a news conference.

The bank raised its second-quarter annualized economic growth estimate for Canada to 2.3% from 1.3%, in part because of temporary factors such as the reversal of weather-related softness and a surge in oil exports. Higher consumer spending, a more stable national housing market and a rebound in exports in the quarter also contributed to the gain.

Analysts said the cautious tone of the remarks made it clear the bank would do nothing for the time being.

“That was a pretty conservative upgrade given what we’ve seen in the data. So clearly the growing wave of negative sentiment around the globe is impacting the Bank of Canada’s view on the outlook,” said Andrew Kelvin, chief Canada strategist at TD Securities.

Following the announcement, the Canadian dollar unwound its gains for the day, touching 1.3143 to the U.S. dollar, or 76.09 U.S. cents.

Despite positive news on the domestic front, the bank cut its forecast for 2019 global growth to 3.0% from 3.2% and 2020 global growth to 3.2% from 3.3% to take into account the damage being done by trade tensions - in particular the tariff war between China and the United States.

“Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks,” it said.

Increased Chinese trade restrictions on canola and meat products will cut Canadian exports by 0.2% over the second and third quarters, the bank estimated.

The bank raised Canada’s domestic growth target for 2019 to 1.3% from 1.2% but cut its 2020 growth forecast to 1.9% from 2.1%.

Sal Guatieri, a senior economist with BMO Capital Markets, said the risks to the Bank of Canada’s policies “are more even-handed” than its U.S. counterpart, which could push through more than one cut.

“We still see Bank of Canada on hold for next couple of years,” he said by phone. “There’s probably a little greater chance of a rate cut if the Fed does see the need to cut rates more rapidly.”

If the Fed did ease monetary policy, the Canadian dollar could strengthen, forcing the Bank of Canada to cut rates.

Additional reporting by Fergal Smith, Nichola Saminather, Moira Warburton and Allison Martell in Toronto; editing by Steve Orlofsky and James Dalgleish