BOC Turns Dovish After Disappointing Data

The Bank of Canada held its monetary policy meeting last week on Wednesday. As widely expected, the central bank left the key interest rates unchanged amid a sudden and a sharp slowdown in the nation’s economic growth in the final months of 2018.

The weakness in the data made policymakers pause the rate hikes and rethink the case for further tightening.

The benchmark interest rates were held steady at 1.75%. This was a ten-year high as widely expected by the overnight swap markets.

CAD

The Canadian dollar extended losses after the monetary policy meeting. This came as the Bank of Canada reversed its hawkish stance from the previous meetings. Before, the central bank had indicated that further rate hikes were necessary.

However, this stance changed as the bank claimed that due to increased uncertainty, the timing of future interest rate hikes would depend on the data.

The Statement

In its monetary policy statement, the BoC said:

Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR).”

The statement continued:

 “While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.”

The BoC has remained staunchly hawkish in its monetary policy meetings so far, judging that further rate hikes were necessary. The markets had therefore allocated room for at least two rate hikes this year. The hawkish forward guidance came despite the US Federal Reserve pausing the increase of their own interest rates.

At the January meeting, the BoC lowered the outlook for 2019. This came due to the fall in oil prices in the latter part of last year. Back then, the BoC claimed that the impact of lower prices was temporary and that higher rates were required.

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