Bank of Canada Holds Rates Steady as Trade War Uncertainty Takes Toll

Bank of Canada Maintains Lending Rate of 1.75%

The Bank of Canada announced it was leaving its key interest rate unchanged at 1.75%. The central bank modified its economic outlook for the Canadian economy, saying it expects slightly stronger growth in 2019 and weaker growth in 2020. The dour outlook is being fuelled by the current trade war between the U.S. and China; uncertainty around the new Canada, U.S., Mexico trade deal; and trade actions by China against Canadian imports.

The Bank of Canada said on July 10 that it was leaving its overnight lending rate at 1.75%. It has stayed at this level since the last increase in October 2018. The move was largely in line with what Bay Street was expecting.¹

The bank said that while the Canadian economy performed better than expected during the second quarter, it was largely a result of temporary factors, including a recovery from a bad winter that nearly caused the Canadian economy to stall.

The Bank of Canada now thinks Canadian gross domestic product (GDP) will advance 1.3% in 2019, up from its April forecast of 1.2%. It expects 2020 and 2021 GDP to come in at around 2.0%.

The reason for the relatively weak GDP growth comes from a number of fronts, namely, the U.S./China trade war, uncertainty surrounding the new North American trade agreement, and even China’s retaliatory sanctions against Canadian meat and canola.

The bank said in a statement that “the biggest downside risk to the global and Canadian outlooks” are trade disputes. The U.S./China trade war is curbing manufacturing activity and business investment, which is also dragging down commodity prices.

How concerned is the Bank of Canada about trade disruptions on the Canadian economy? Carolyn Wilkins, Bank of Canada’s senior deputy governor, said that trade actions and ongoing uncertainty is projected to reduce Canadian GDP by as much as 2% by the end of 2021.

That doesn’t factor in the ongoing trade dispute between Canada and China. Restrictive trade actions against Canadian imports of meat and canola are expected to reduce Canadian exports by around 0.2%. There are some encouraging signs for the Canadian economy. Most notably, the U.S. killed off its aluminum and steel tariffs on Canadian imports.

Still, because of ongoing uncertainty with the trade dispute between the world’s two biggest economies, which Wilkins says, “is the biggest wild card in our outlook,” the Bank of Canada also lowered its global economic forecast for 2019 to 3.0%, down from April guidance of 3.2%.²

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The stock market may be at record levels and the Canadian economy is doing better than some expect, but concerns about global trade forced the Bank of Canada to keep its key lending rate at 1.75%, with some analysts expecting it to reduce in 2020. The trading professionals at Learn-To-Trade.com want investors to understand that manipulating the lending rate, and even cutting it, does not magically solve the damaging effects of a global trade war. But it does open up a window of opportunity for investors.

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Sources:

1. “Bank of Canada maintains overnight rate target at 1 ¾ percent,” Bank of Canada, July 10, 2019; https://www.bankofcanada.ca/2019/07/fad-press-release-2019-07-10/.
2. Mackrael, K. “Canada Central Bank, Holding Steady, Flags Trade Concerns,” Wall Street Journal, July 10, 2019; https://www.wsj.com/articles/canada-central-bank-holding-steady-flags-trade-concerns-11562770351.

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