Bank Of Canada Keeps Rates Unchanged

The Canadian Dollar was lower this week as the Bank of Canada struck a dovish tone at its first rates meeting of the new year. While the BOC kept rates on hold as was expected, it was the downgrading of its growth outlook for 2019, along with more cautious forward guidance, that poured cold water on CAD.

This marks the second consecutive meeting at which the BOC has kept rates on hold and highlights the bank’s growing concern over the domestic and external outlook.

In the statement released alongside the rate decision, the BOC struck a noticeably more cautious tone. In October 2018, having raised rates for the fifth time since the middle of 2017, the BOC highlighted the necessity of further rate hikes. Now, the bank is clearly emphasizing its intention to remain on hold while it monitors certain developments.

While the BOC reaffirmed its view that the next move in rates will be higher, it said that the pace of further rate hikes “will depend on how the outlook evolves, with a particular focus on developments in oil markets and the Canadian housing market.”

Collapse in Oil Prices Creating Difficulty

 A major driver of the change in the bank’s outlook has been the dramatic collapse in oil prices which have come off by around 40% since the 208 highs. 

Referring specifically to the sell-off in oil, Canada’s chief export, the BOC said: 

“The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income.”

The bank explained the further issues around the sell-off in oil saying:

“While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further.”

BOC Highlights Weak Household Consumption

However, it isn’t just the energy sector which is causing the BOC problems. The bank also noted weakness in housing prices and household consumption. On these issues, the BOC said:

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