World News

Bank of Canada holds interest rates, opens door to possible cut

By Kelsey Johnson and David Ljunggren

OTTAWA (Reuters) – The Bank of Canada maintained its key overnight interest rate at 1.75% as expected on Wednesday but opened the door to a possible cut should a recent slowdown in Canadian economic growth drag on.

The central bank – which has kept rates unchanged since October 2018 – said that while the economy has been resilient, recent economic data has been mixed, and noted “unexpectedly soft” indicators of consumer confidence and spending, and weaker business investment.

“We’re not saying that the door is not open to an interest rate cut. Obviously it is – it is open,” Bank of Canada Governor Stephen Poloz told a news conference.

“But it hinges on how the data evolve from here because … we have a strong belief that this will prove temporary, but temporary could be longer or shorter,” added Poloz, who later noted rates were “still really low”.

The central bank slashed its forecast for fourth quarter annualized growth to 0.3% from 1.3% in October. It also pegged annualized growth for the first quarter of 2020 at 1.3%, down from a previous internal forecast of 1.7%.

The bank said it would be watching closely to see if the recent slowdown in growth was more persistent than forecast.

Poloz’s comments increased the pressure on the Canadian dollar, which had already dropped after the interest rate decision. By 12 p.m. EST (1700 GMT) it was trading at C$1.3140, or 76.10 U.S. cents.

Money markets now see about a 20% chance of a rate cut in March. [BOCWATCH]

The statement marked the second time in a matter of months the bank has mused about easing. Poloz told reporters in October the bank had discussed whether a rate cut was needed to insure against risks to the economy.

“The fact that the Bank of Canada didn’t include the word ‘appropriate’ in its statement says it all,” said Simon Harvey, FX analyst for Monex Europe and Monex Canada.

“Rates are going to change at some point this year – is what markets have taken out of it,” he said.

The Canadian economy was no longer operating close to capacity, the bank said, adding it would pay particular attention to developments in consumer spending, the housing market and business investment.

It said real Canadian GDP for 2020 would be 1.6% rather than the 1.7% it predicted in October but raised its 2021 forecast to 2.0% from 1.8%.

(Reporting by Kelsey Johnson and David Ljunggren in Ottawa, additional reporting by Fergal Smith, Allison Martell, and Nichola Saminather in Toronto; Editing by Bernadette Baum and Jonathan Oatis)