The Bank of Canada held interest rates steady on Wednesday as it stayed focused on the "significant uncertainties" facing the economy, even while acknowledging that fourth-quarter growth may have been stronger than anticipated.
In an unusually short statement, the central bank said it was looking past the temporary impact of higher energy prices that drove inflation above its two per cent target in January, noting that muted underlying inflation still pointed to material excess capacity.
The bank said it was continuing to monitor the risks contained in its January Monetary Policy Report (MPR), which included the lack of clarity over what policies new U.S. President Donald Trump will enact.
BMO Capital Markets senior economist Benjamin Reitzes said the Bank can only hold off on a hike for so long.
“They remain firmly on hold, and have opted to remain focused on the negatives, while largely overlooking the recent string of better data," Reitzes wrote in a Wednesday note. "The BoC’s dovish skew is intended to keep Canadian yields and the loonie under pressure. However, if the data continue to be positive, they won’t be able to deny the obvious for much longer.”
The bank kept the benchmark interest rate at 0.50 per cent, as was widely expected, saying it "remains attentive to the impact of significant uncertainties weighing on the outlook and continues to monitor risks outlined in the January MPR".
Recent data on consumption and the housing market suggest economic growth in the final quarter of 2016 may have been "slightly stronger" than the 1.5 per cent the bank had forecast, but exports continue to face ongoing competitiveness challenges.
Bank of Canada Governor Stephen Poloz said in January that a rate cut remains on the table if the risks to the economy materialize. The bank cut rates twice in 2015 to offset the collapse in oil prices and most analysts expect the central bank will hold steady before raising rates in 2018.
The Canadian dollar and bond yields remain near the elevated levels seen in January, the bank said. In January it had pointed to the stronger Canadian dollar against the greenback and other currencies as muting the outlook for exports.
Subdued wage growth and hours worked also showed persistent economic slack in the economy, in contrast to the United States and despite recent gains in employment, the bank said.
While Trump has said the United States will only be "tweaking" its trade relationship with Canada, his promise to renegotiate the North American Free Trade Agreement has nonetheless muddied the waters for Canada's economic outlook. Canada sends 75 per cent of its exports south of the border.
Trump said on Tuesday he wanted to provide tax relief to the middle class and cut corporate taxes, but he did not provide specifics or comment on a proposed border adjustment tax that could hurt Canadian exporters.
- with files from BNN