Published: Thu, July 11, 2019
Markets | By Otis Pena

Poloz speech: We are content with today's setting of interest rates

Poloz speech: We are content with today's setting of interest rates

Evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook.

The Bank of Canada held interest rates steady as expected on Wednesday and made clear it had no intention of easing monetary policy, while highlighting the risks trade wars posed to the global economy.

Within Canada, the Bank projects real GDP growth to average 1.3% in 2019 and around 2% in 2020 and 2021.

Big Canadian banks, however, have to worry about more than just the interest-rate moves of the Bank of Canada.

The bank warned that worldwide trade disputes are having a "material effect on the global economic outlook".

The bank's governing council appeared to be in no rush to move the rate, even as they acknowledged policy-makers in the USA and Europe have signalled they may lower interest rates to respond to the weakening world economy.

"Growth in the second quarter appears to be stronger than predicted due to some temporary factors, including the reversal of weather-related slowdowns in the first quarter and a surge in oil production", the central bank said in a statement.

Global markets mixed, pausing ahead of Fed chief testimony
Excellent US employment figures have fueled concerns a rate cut might be taken off the table . But an unexpectedly strong report last Friday has dimmed investors' expectations.

The Bank of Canada might not be such an outlier after all. It sees the economy slowing to 1.5 per cent in the current quarter. "We continue to look for the Bank of Canada to cut interest rates in January 2020". A rate-cut by the U.S. Federal Reserve could affect their earnings as well, as lenders have had weaker earnings growth in their home market of late supplemented by stronger showings from their U.S. and global businesses.

Today the exchange rate is hovering around $1.24 Canadian-$1USD.

The Bank of Canada raised its forecast for second-quarter growth to an annual pace of 2.3 per cent, up from its April projection of 1.3 per cent, following the surprisingly swift rebound from the slowdown at the start of the year. But its tone suggests a cut is more likely than an increase, a shift from earlier this year. "And I inform, on the tip of the day, the banks possess weathered the low-hobby-rate atmosphere since the financial crisis barely neatly". "However the growth is clouded by persistent trade tensions", the bank said. "That could put upward pressure on the Canadian dollar the Bank of Canada might need to address by cutting rates".

BoC maintains interest rates as expected at 1.75%.

But global trade tensions could prompt the bank to cut its forecast for the world economy, Mendes said, noting the United States had slapped more tariffs on Chinese goods since the bank's April forecasts.

The gap between Canada's 2-year yield and its USA counterpart narrowed by 4.4 basis points to a spread of 20.7 basis points in favour of the US bond, its smallest gap since January 2018.

Adding to support for the loonie, the price of oil, one of Canada's major exports, was boosted by data showing US crude inventories shrank and as major producers cut almost a third of offshore Gulf of Mexico production ahead of an expected storm.

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