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Bank of Canada Holds Steady, Citing ‘Intact’ Global Recovery

Erik Hertzberg and Theophilos Argitis

(Bloomberg) -- The Bank of Canada struck an upbeat tone Wednesday, citing evidence of a stabilizing global economy and a resilient domestic backdrop that gives little indication policy makers are in a rush to lower borrowing costs.

The Ottawa-based central bank held its benchmark interest rate at 1.75% for a ninth consecutive meeting, retaining language from its previous statement that it judges the current level to be “appropriate.” The prolonged pause has left Canada with the highest policy rate among advanced economies.

The decision showcases a Bank of Canada still comfortable with its wait-and-see stance, maintaining its outlier status in a period of global monetary easing. In the statement, officials said the October projection for a recovery in global growth “appears to be intact,” even as international trade disputes remain the biggest source of risk. It characterized domestic economic conditions, driven by consumers and housing, as resilient.

“Future interest rate decisions will be guided by the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy,” policy makers led by Governor Stephen Poloz said in the statement.

“There is nascent evidence that the global economy is stabilizing,” officials said, adding they expect global growth to edge higher over the next couple of years.

The Canadian dollar extended gains on the decision, up 0.6% to C$1.3219 per U.S. dollar at 10:20 a.m. Toronto time, as investors pared bets on future cuts. Yields on two-year Canadian government bonds also jumped, trading at 1.62%, from 1.56% on Tuesday.

“It’s steady as she goes for Captain Poloz,” Benjamin Reitzes, an economist at Bank of Montreal, said in a note to investors. “Today’s statement can be characterized as glass half full.”

All 27 economists surveyed by Bloomberg expected the Bank of Canada to hold on Wednesday, though many see the bank eventually cutting borrowing costs as early as the first quarter next year. Markets are still pricing in a two-thirds chance of a rate cut over the next 12 months.

Analysts characterized the statement as less dovish than the previous statement in October, when the central bank highlighted global risks and Poloz acknowledged the central bank had considered the merits of an insurance cut. While there was no reference to that in Wednesday’s statement, Deputy Governor Tim Lane will provide more insight into the deliberations in a speech Thursday.

“Today’s statement dialed back the dovish rhetoric of the prior statement, and as such suggests that the BoC is pretty firmly on hold for now,” Andrew Grantham, an economist at CIBC World Markets, said in a note.

On the global outlook, policy makers said financial markets are being supported by easing measures by other central banks, and “waning recession concerns.” And while trade uncertainty persists, the Bank of Canada noted commodity prices and the currency have been stable.

Investment Momentum

Domestically, the central bank said gross domestic product came in as expected in the third quarter, driven higher by consumption and housing, as well as unexpected strength in investment. Policy makers, who had expected a decline in capital spending in the second half, said they will assess the extent to which the pickup “points to renewed momentum” in investment.

The Bank of Canada reiterated that the recent record of core inflation around 2% is consistent with an economy operating near capacity. While inflation is expected to pick up in coming months, the acceleration should be temporary due to year over year movements in gasoline prices.

One thing constraining the central bank is debt. Credit growth and real estate activity are re-accelerating in the second half of this year, propelled in part by lower interest rates imported from abroad, and any additional stimulus by the Bank of Canada could fuel risks.

“The bank continues to monitor the evolution of financial vulnerabilities related to the household sector,” they said in the statement.

(Updates with analyst comments in sixth and ninth paragraphs)

To contact the reporters on this story: Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net;Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Stephen Wicary

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