Bank of Canada Holds Rates Steady Boosting CAD

Ibeth Rivero

cadThe Canadian economy expanded by 0.3% in the third quarter of 2019, a noteworthy slowdown given the previous quarterly growth figure (Canada’s GDP advanced by 0.9 percent over the second quarter) but matching the Bank’s expectations. A fall in exports was the main cause behind this contraction, as the country’s export level fell 1.3% in September after a significant rebound in August.

The dire global economic situation, mostly driven by the current trade war between the United States and China, was among the main concerning factors for market actors. Those elements could make traders think that Canada’s economic situation would demand monetary stimulus. However, the Bank of Canada decided, for the ninth consecutive time, to hold its overnight rate steady at 1.75%.

With this decision, the Bank of Canada itself hinted that the secret is in the details. Yes, the GDP figure may be sending concerning signs to the market, however, other economic indexes are showing that the Canadian economy may be way more resilient than it might seem at first sight.

Canada’s labor market, for example, showed noteworthy gains in August and September, while the latest average wages figure showed an increase to 22.55 CAD/Hour in September. Consumer spending expanded as well, as did business investment spending which increased by 2.6% in the third quarter, against bearish expectations. Housing start figures which showed stronger levels of permit issuance in the last month, also suggest a rebound in the future despite the recent drop.

All those details boosted the Bank of Canada’s confidence regarding the future of the economy. The fact that inflation levels remained very close to the target only aided the bank’s decision. The Bank foresees a temporary increase in the next months as well, which is expected to be mostly driven by yearly movements in gasoline prices.

“Overall, the tone of developments in recent weeks gives us more confidence in the outlook for growth and inflation that we set out back in October,” explained deputy governor Timothy Lane.

The Bank of Canada’s evident optimism regarding the future of the economy made it remain one of the few major central banks in the world that haven’t reacted to the global economic weakness with the implementation of monetary stimulus measures. In fact, Canada has left its benchmark cash rate unchanged since October 2018, quite noteworthy given that its American counterpart, for example, has cut the rates three times this year.

“The experience of the past decade shows that Canada and the United States have followed different roads, reflecting differences in our economic conditions," explained Lane.

This is, of course, good news for Canadian Dollar bulls, since despite leaving the rate unchanged the Bank of Canada set an optimistic tone on the economy. This trend was aided by higher oil prices (which were also boosted by expectations of production cuts) and the fact that the U.S. dollar has been tumbling since Tuesday mostly due to weak economic data (raising concerns about the future of the U.S. economy) and mixed signs regarding a trade deal between the US and China.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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