The Bank of Canada held interest rates steady on Wednesday, as expected, saying that while trade policy is an “important and growing source of uncertainty,” inflation is running close to 2 percent and the economy is near capacity.
Reiterating its key January phrasing word-for-word, the bank said that while more hikes are probably warranted, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target, and pledged caution in considering future rate moves.
Nodding to the dual influences of policy decisions in the United States, Canada’s largest export market, the bank said that new U.S. government spending and tax cuts are anticipated to boost American growth in 2018 and 2019.
“However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks,” the bank said.
U.S. President Donald Trump said last week he would impose global tariffs on steel and aluminum, later adding that Canada could get a better deal if it agrees to U.S. terms in the renegotiation of the North American Free Trade Agreement. Canada is hoping for an exemption from the tariffs. NAFTA spans the United States, Canada and Mexico.
Disruptions to trade would sideswipe Canada’s export-led economy and make it difficult for the Bank of Canada to continue hiking rates, even as inflation pressures are beginning to build.
In holding rates steady after three rate hikes since last July, the bank acknowledged that fourth-quarter GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline.
The gain in imports mainly reflects stronger business investment, which adds to the economy’s capacity, the bank said.
“Inflation is running close to the 2 percent target and the bank’s core measures of inflation have edged up, consistent with an economy operating near capacity,” the bank said.
It noted that while wage growth has firmed, it “remains lower than would be typical in an economy with no labor market slack.”
Turning to Canada’s precarious housing market, the bank said strong data late in 2017 and softer data this year suggests that some demand was pulled forward ahead of new mortgage rules that have made it harder for some buyers to get financing.
It also noted that household credit growth has decelerated for three straight months, and reiterated that policymakers continue to monitor the economy’s sensitivity to higher borrowing costs.