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Bank of Canada keeps key interest rate on hold at 1%

28 Octobre 2017

Policy makers led by Governor Stephen Poloz left the benchmark overnight rate at 1% on October 25, after consecutive hikes at the bank's last two decisions in July and September, and warned they will remain "cautious" when considering future hikes.

While there is also some evidence that gains in technology and digitalization has dampened inflation in advanced economies, the effect in Canada appears to be small, partly due to a relatively low adoption rate of e-commerce and other digital technologies, the bank said.

The Bank said the current level is appropriate given the risks and uncertainties the country is facing, in particular those related to the renegotiation of the North American Free Trade Agreement.

But the almost 6 percent slide in the loonie since September 7, when the central bank last hiked rates, is the biggest drop among the G10 currencies over that period. The increases removed the two rate cuts introduced in 2015 as insurance following the collapse in oil prices.

Economic growth in Canada was stronger and more broad-based than expected, the central bank said, but growth is expected to moderate in 2017's second half.

However, Shenfeld added, there are other factors that could affect the track of economic growth, such as the possibility of the end of NAFTA, what might be the impact of new mortgage rules, and how Ontario's new minimum wage might affect inflation rates.

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In cautiously considering another rate move, the bank said it would observe how the economy adjusts to higher interest rates, tighter mortgage rules and uncertainty about USA trade policy.

Canadian government bond prices were higher across the yield curve, with the two-year up 3.5 cents to yield 1.439 per cent and the 10-year rising 18 Cents to yield 2.012 per cent.

The economy grew at an annual rate of 3.7% in the first quarter of 2017 and 4.5 % in the second quarter.

Data showed that the US economy unexpectedly maintained a brisk pace of growth in the third quarter as an increase in inventory investment and a smaller trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction. Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates.

The Bank estimates that the economy is operating close to its potential. The changes, which will take effect January 1, are expected to trim 0.2 per cent from GDP by the end of 2019, the bank said. A rate increase is now fully priced in by March, with another in September. It also projects steady growth in business investment, which rebounded in early 2017. The commitments, however, are expected to lift growth over the coming quarters, the report said.

Bank of Canada keeps key interest rate on hold at 1%