Bank of Canada keeps key policy rate unchanged at 1.25 pct

As widely expected, the Bank of Canada kept its key interest rate on hold at 1.25 percent today. The statement accompanying today’s decision had a dovish tone. Global growth is seen as strong, and U.S. policy changes are likely to stimulate U.S. growth in 2018 and 2019. However, it was also noted that the trade policy developments are a significant and growing source of uncertainty.

The overall level of output seen is consistent with their expectations in spite of a weaker than anticipated end to last year. The rise in imports was linked to stronger business investment, contributing to economic capacity. Housing is the wildcard, and the Bank sees the solid performance in the fourth quarter as representative of a pull-forward of demand, noted TD Economics. The effect of policy changes will take time to assess. The statement also noted that household credit growth has slowed for three straight months.

On the inflation front, the statement noted an overall rate close to 2 percent and the further gains in the central bank’s core measures, indicating to an economy operating near capacity, although temporary factors are having an effect especially on the headline measure. On wages, the central bank continues to see the current rate as lower than typical for an economy with no labor market slack.

The Governing Council continues to be of the view that higher rates would be warranted over time, but would continue to assess the economy’s sensitivity to interest rates, economy capacity, and wages/inflation, noted TD Economics.

“As the statement pointed out, ultimately rates are likely to rise further, but with time needed to assess the impacts of both domestic policy changes and external developments, we remain of the view that the July meeting is the most likely to see the next move”, added TD Economics.

At 20:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was neutral at -42.6694, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -30.6945. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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