Market News

By Jordan Fleguel

The Bank of Canada held its key interest rate steady on Wednesday, as was widely expected, and two experts say conflicting economic data is likely what kept the bank on the sidelines.

For a second straight decision, Canada’s central bank announced it will hold its overnight interest rate at 2.75 per cent. The two rate holds followed seven consecutive cuts from the bank over the past year.

Though a hold was expected by economists and priced in by markets, many experts expected a more dovish tone from the central bank considering the potential for mass economic damage from the ongoing trade conflict with the U.S.

“I would probably say it was a bit more neutral than dovish,” Ed Devlin, founder of Devlin Capital and Senior Fellow at the C.D. Howe Institute, told BNN Bloomberg in a panel discussion Wednesday.

“If they didn’t go last time when the markets were kind of pricing a 50-50 (chance) of a rate cut, there was nothing that really evolved since then that would make them change their stance… they did kind of what you’d expect them to do.”

Warren Lovely, chief rates strategist and managing director at National Bank Financial, said the central bank’s decision to stand pat was not due to a lack of economic data, as it had a significant amount to digest prior to its latest decision, however much of it was conflicting.

“There are mixed signals everywhere you look, and I guess they’re using that to justify holding policy rates here. The GDP (gross domestic product) outlook; we saw some growth in the first quarter, but we know there’s some weakness ahead,” he said.

“On inflation; headline inflation seems to be in control but core inflation’s hot. The labour market earlier had been healthy, now it looks weak. The housing market had been weak, now it’s maybe showing a little bit of signs of life in May. So very much mixed signals.”

Lovely said that despite Wednesday’s decision, he doesn’t foresee the Bank of Canada holding rates indefinitely, but the bank’s wait-and-see attitude is indicative of the “extraordinary uncertainty” gripping economies and markets around the world.

Devlin said that while he acknowledges the challenging position the bank is currently in, there could be consequences if policymakers wait too long to ease borrowing costs in an economy that may experience a prolonged period of weakness.

“They think they’re neutral at 2.75 per cent. I think the neutral rate’s lower, so they’re probably more restrictive than they think they’re going to be… I still think there’s a non-insignificant risk that we get back to zero (per cent interest rates) and that is when nasty things happen,” he said.

“We want to avoid that at all costs. So, if there’s an outcome you want to avoid at all costs, the balance of risk to the economy is to the downside, and you might be a little more restrictive than you think you are, I would say that when you can, get going.”

Devlin argued that the bank should be looking to get to a policy rate between 1.5 per cent and two per cent before potentially pausing again for a period of time to assess the health of the economy.

“All we know is there’s definitely uncertainty and it’s doing damage, we just don’t know what the damage is. And so, it’s better to err on being a little bit more accommodative and easing your monetary policy. If you’re wrong you can always bring rates back up,” he said.

“Take the insurance policy out now. Don’t wait until the house is burning down.”