Bank of Canada keeps benchmark rate at 0.5% as U.S. poised to hike its own

OTTAWA – The Bank of Canada left its trend-setting interest rate unchanged Wednesday at a time when the U.S. Federal Reserve is poised to hike its own benchmark for the first time in years.

Canada’s central bank touched on the unique economic situations facing the two neighbours as it explained its decision to hold its rate at 0.5 per cent.

The United States, it said, continues to grow at a “solid pace,” even though private domestic demand remains weaker than expected.

Canada, meanwhile, continues to deal with the shock of already-low commodity prices, which have sunk even further and dragged down the loonie.

“The ongoing terms-of-trade adjustments and shifting growth prospects across different regions are contributing to exchange rate movements,” the Bank of Canada said in a statement released along with its rate announcement.

“In this context, policy divergence is expected to remain a prominent theme.”

The remark cements the central bank’s position that it needs to map its own route to navigate economic challenges, even though the Fed is widely expected to raise its rate at a Dec. 15-16 meeting for the first since the financial crisis.

“This is likely a message to those who think that the bank could be pressured to tighten as the Fed pushes (its) rate higher,” BMO Capital Markets senior economist Benjamin Reitzes wrote in a note to clients.

“Governor (Stephen) Poloz is making it clear that even as the Fed hikes, Canadian rates will stay steady.”

TD economist Leslie Preston said Canada has been much more severely affected by the collapse in oil prices than the U.S. because crude is a much bigger part of the Canadian economy.

“This is one of the benefits of having independent monetary policy in Canada,” Preston said Wednesday in an interview.

“The Bank of Canada can adjust interest rates to help offset these shocks that have hit Canada’s economy.”

Preston added that Poloz will have to keep his eye on any side-effects of an eventual rate increase in the U.S., which is expected to dampen economic growth somewhat in Canada.

She also said the governor’s decision-making must also continue to monitor household indebtedness, which has gradually crept higher during this prolonged era of super-low interest rates.

“All of these balls that they’re juggling ultimately affect the inflation outlook,” Preston said.

Canada’s inflation rate, which the central bank said Wednesday remains within its target range, is the key determinant in whether or not to move on rates.

In explaining its decision, the bank said the economy has grown largely in line with its October projections and reiterated that it expects growth to moderate to 1.5 per cent in the final three months of 2015 before rising to two per cent in the first quarter of 2016.

The economy has received help from the lower Canadian dollar, the ongoing U.S. recovery and the Bank of Canada’s moves to cut rates twice this year, the bank said.

It also highlighted economic challenges such as lower business investment in resource sectors and the increasing vulnerability detected in the housing sector. The labour market, however, has held up well even though commodity-producing regions have suffered significant jobs losses.

Wednesday’s rate decision came a day after fresh Statistics Canada data disclosed that real gross domestic product grew at an annualized rate of 2.3 per cent in the three-month period ended in September after the economy went into reverse over the first half of 2015.

But the reading by the federal statistical agency found the turnaround quickly showed signs of lost momentum, with the economy having contracted by 0.5 per cent at a non-annualized rate in September. The drop was mostly tied to Canada’s struggling manufacturing and natural resources industries.

That suggests real GDP for the fourth quarter could come in weaker than expected. Analysts said below zero growth to end the year could force the Bank of Canada to consider lowering its rate in the new year.

The Bank of Canada is scheduled to make its next rate announcement in January.

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