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Bank of Canada keeps policy interest rate on hold at 1.25 pct

The Bank of Canada kept its key monetary policy interest rate on hold at 1.25 percent today, as was widely anticipated. The central bank also released its latest Monetary Policy Report, giving an update on how the central bank sees the economy evolving. In the event, the growth outlook for this year was downwardly revised a bit to 2 percent from 2.2 percent. This seems to greatly reflect the weak start to the year, which is likely to give way to healthy growth in the second quarter. On the contrary, the 2019 forecast saw a marked upgrade, from 1.6 percent to 2.1 percent on a stronger consumption outlook and slower imports. Also, the central bank expects the economy to expand 1.8 percent in 2020, consistent with the economy’s upwardly revised trend.

The BoC has raised the range for 2017-2019 growth rates by around 0.4 percentage points. Thus, the central bank now sees the economy as having nearly, but not quite reached its potential, rather than being at or slightly above it at the end of last year.

Most standard frameworks imply that with more slack comes less inflationary pressure, and this seems to be the case for the central bank. Recent inflationary pressures are seen as partially temporary, thanks to minimum wage rises and other transitory effects. Inflation is likely to moderate to just above the target rate of 2 percent next year and in 2020 as these effects wane.

One of the important focuses of the central bank has been assessing labor market slack. The Monetary Policy Report notes rebounding conditions, but areas of concern remain: youth labor market participation is still seen as weak, while long-term unemployment is seen as elevated. However, the Bank of Canada continues to keep a constructive outlook for labor markets, and has provided something of a benchmark.

The report also gave an update to the important economic risks as seen by the central bank. It mentioned softer investment and exports, which is a reflection of both recent weak trade data and uncertainty around NAFTA and the global trading system more generally. The second risk was also to the downside, with a sharp tightening in global financial conditions possible.

“The core message sent today appears to be that Poloz and company remain set on further hikes, but are in no rush to get there. The statement accompanying the decision may have had a hint of hawkishness to it, but the details of the Monetary Policy Report were decidedly dovish”, noted TD Economics in a research report.

At 15:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was slightly bearish at -59.9176, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 18.8721. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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