The Canadian dollar is sliding midweek after the central bank removed its bias about future increases to interest rates as the economic slowdown intensifies. This has left the market betting that there will not be a rate hike until at least sometime next year. While it did pledge to adapt monetary policy to incoming data, it does not anticipate substantial growth anytime soon.
On Wednesday, Bank of Canada (BOC) governor Stephen Poloz left the benchmark interest rate unchanged at 1.75%, which the market had widely expected. However, it was the decision to remove any allusion to future rate hikes, something that has been included since 2017, that spooked markets. Investors are now expecting the rate pause to linger into 2020.
There is also a belief on Bay Street that the odds of the BOCâs next move on rates could be split between a hike and a cut.
In a statement, the central bank said of its new policy statement:
Governing Council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive.
The central bank also presented a more bearish economic forecast, citing sluggish global growth, slumping real estate, and uncertainty in the crude oil market. The BOC noted that these trends brought the national economy to a halt over the last six months, adding that future growth is likely to remain the same.
According to the BOC, estimates for gross domestic product (GDP) growth this year were revised down from 1.7% in January to 1.2%, which is below economistsâ forecasts of 1.5%. Policymakers maintained their projections for 2.1% growth in 2020 and 2% in 2021.
Housing activity is expected to stabilize given continued population gains, the fading effects of past housing policy changes, and improved financial conditions. Consumption will be underpinned by strong growth in employment income. Outside the oil and gas sector, investment will be supported by high rates of capacity utilization and exports will expand with strengthening global demand.
We are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.
It expects consumer price inflation to hover around its 2% target rate.
The USD/CAD currency pair rose 0.36% to 1.3470, from an opening of 1.3425, at 15:45 GMT on Wednesday. The EUR/CAD surged 0.20% to 1.5074, from an opening of 1.5044.
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