Bank of Canada keeps overnight rate on hold at 1.75 pct, likely to hike in spring 2019

The Canadian central bank, Bank of Canada, kept its overnight rate on hold at 1.75 percent today, in line with consensus expectations. The statement released alongside the decision struck a dovish note. One of the biggest stories since the central bank’s October rate hike is the pricing challenges facing Western Canadian oil producers, and the recent announcement of mandatory production curtailments, noted TD Economist in a research report.

Weak commodity prices had already been expected dampen investment and exports in the Bank’s last communique, but recent moves are seen as making the outlook for the sector “materially weaker”. Beyond the energy sector, the central bank also sees weakening momentum coming out of the third quarter, and historic revisions from Statistics Canada imply that ‘there may be additional room for non-inflationary growth’. On the contrary, tax changes and capacity restrains are still expected to underpin non-energy investment, and credit/housing markets are seen as stabilizing.

Meanwhile, the data, on the inflation front, appears to be meeting expectations, as core measures continue to track two percent, and headline inflation is likely to ease due to lower gasoline prices. The statement again discussed rates getting to ‘neutral’, but with the significant change that the policy rate requires to rise to a neutral range – rather than to a neutral stance as discussed in October. This small language tweak implies more flexibility around the end-point for the tightening cycle, and strengthens the dovish tone that permeates the statement more generally, said TD Economics.

“We no longer expect the Bank of Canada to hike its policy interest rate in January. Spring 2019 now appears to be the more likely timing, allowing for the Bank to ensure that the growth narrative is back on track”, added TD Economics.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was neutral at -40.2292, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 56.9344. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex