OTTAWA—The Bank of Canada left its key interest rate unchanged at 1.75% on Wednesday and marked down its estimates for near-term growth, opening the door for a future rate cut if the domestic outlook worsens.
In a statement that accompanied the rate decision, the central bank said growth would be slower than previously anticipated after exports, business investment and job creation all weakened toward the end of 2019. While residential investment has continued at a solid pace, the central bank said, consumer confidence and spending have been unexpectedly soft.
“Some of the slowdown in growth in late 2019 was related to special factors that include strikes, poor weather, and inventory adjustments,” the Bank of Canada said. “The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted.”
In determining the path for future interest rates, policy makers “will be watching closely to see if the recent slowdown in growth is more persistent than forecast,” the central bank said.
The cautious tone of the statement suggests the Bank of Canada “is a bit more worried that it will have to act,” CIBC World Markets economist Avery Shenfeld said. Mr. Shenfeld said he expects that a rise in unemployment in the coming months will challenge the central bank’s confidence on consumer spending and lead to a rate cut in the spring.
Canada’s central bank has kept interest rates on hold since October 2018, bucking a trend that saw many of its developed-country peers introduce easier monetary policy last year. Bank of Canada Gov. Stephen Poloz has previously said the economy was demonstrating enough resilience for policy makers to keep interest rates steady, despite a weaker global backdrop.
The shift to a more cautious tone on Wednesday comes after a series of disappointments on the domestic front. The Canadian economy contracted in October, and indicators point to soft activity in November, leading many economists to anticipate the country’s gross domestic product will either stall or contract slightly in the fourth quarter.
The Bank of Canada downgraded its fourth-quarter growth forecast to 0.3% on an annualized basis, followed by an estimate of 1.3% annualized growth for the first quarter of this year. The central bank said its outlook for those two quarters is now about three-quarters of a percentage point lower, on average, than its previous forecast.
Data issued earlier Wednesday from Statistics Canada offered further evidence of a slowing economy. Wholesale trade, which represents the largest component of Canada’s services sector, fell 1.2% for a second straight month in November.
While Canada’s annual inflation rate rose 2.2% in December, or above the Bank of Canada’s target, the details of the report suggested a softening in upward price pressure.
Meanwhile, the bank said there are signs the global economy is stabilizing. The U.S. and China signed an initial deal on tariffs this month, and the revised North American trade pact, or USMCA, is now closer to ratification. The central bank said the effects of trade-policy uncertainty, which have constrained growth in Canada and abroad, are expected to diminish gradually over the next two years.
Overall, the central bank said it anticipates Canada’s real GDP growth would be 1.6% in 2019 and 2020, and 2% in 2021.
The decision to leave interest rates on hold this week was widely expected. All 11 primary dealers of Canadian government securities surveyed by The Wall Street Journal said they anticipated a stand-pat decision as the central bank considers whether the recent spate of domestic weakness will persist.
The Bank of Canada’s next interest-rate decision is due March 4.
Write to Kim Mackrael at kim.mackrael@wsj.com
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Bank of Canada Leaves Key Interest Rate Unchanged at 1.75% - Wall Street Journal
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