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Bank of Canada maintains key lending rate at 1.25%

2 min

Ottawa (AFP)

Canada's central bank on Wednesday maintained its key lending rate at 1.25 percent, as growth slows and the prospect of protectionist US trade policies cast a shadow over the global economy.

"Global growth remains solid and broad-based," the Bank of Canada said in a statement. "However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks."

"While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target," it concluded, pointing to inflation running close to its 2.0 percent target.

The decision not to hike interest rates was widely expected by analysts, after a 0.25 percentage point increase in the bank's benchmark rate mid-January.

The central bank noted that US government spending and tax cuts are anticipated to boost growth in the United States -- Canada's largest trading partner -- this year and in 2019.

But, Canada, the United States and Mexico are in talks to revamp the North American Free Trade Agreement, which US President Donald Trump has threatened to leave.

The next round of negotiations is to take place in Washington at the end of March, and the outcome is uncertain.

Trump's plan to impose tariffs on steel and aluminum imports are also complicating talks, as the measure would disproportionately harm Canada, which is the largest supplier of steel and aluminum to the United States.

In its announcement, the bank noted that the Canadian economy is operating at near capacity but slowed after posting relatively strong 3.0 percent growth in 2017.

Fourth quarter growth in particular was "slower than expected," it said, due to higher imports and only a partial recovery of exports from a third-quarter decline.

Similarly, housing data was strong in 2017 but was softer at the start of 2018. The bank said "it will take some time to fully assess the impact" of new restrictive mortgage rules.

Canadians' high household debt has long been a concern, but the bank also noted a deceleration of household credit growth for three consecutive months.

"The bank continues to monitor the economy's sensitivity to higher interest rates," it said.

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