By Mike Caggeso
The Bank of Canada announced Wednesday that it will keep its target for its overnight lending rate at 4.5%, and indicated that previous hints at a rate increase are economically rational, but premature.
The economy of our northern neighbor is growing at a faster clip than expected. Its total and core CPI inflation for July clocked in at 2.2% and 2.3%, respectively, higher than its target of 2%. Its dollar has been gaining steadily on its U.S. counterpart, hitting a 30-year high at 96 cents to the dollar – or nearly par.
Domestic demand is "robust," pushed by a growing labor market and — to surprise of some of U.S. investors — higher-than-expected increases in home sales and housing prices, the Bank of Canada said in a statement.
Canada's central bank said "the pace of economic growth in the first half of this year was above the Bank's expectations. It now appears that the Canadian economy is operating further above its production potential than was estimated in July."
Virtually all indicators point to raising rates to keep inflation within reach of its target.
The exception: The United States, because of its credit-market and housing-sector woes. The U.S. central bank's policymaking Federal Open Market Committee is scheduled to meet on Sept. 18, where most observers expect that a discussion of reducing short-term interest rates will be on the table.
So, in effect, Canada's rate hold is as close to a rate cut as you can get because, again, all economic signs indicate that the Bank of Canada would have increased rates if looming credit concerns to its south did not exist.
"Against this background, the Bank judges that the current level of the target for the overnight rate is appropriate. However, there are significant upside and downside risks to the outlook for inflation. On the upside, there is a possibility that household demand in Canada could be stronger than anticipated, while on the downside the ongoing adjustment in the U.S. housing sector could be more severe and spill over to the U.S. economy more broadly," the Bank of Canada's statement said.
Canada is one of several countries that are holding the line on interest rates, waiting to see what the U.S. central bank does for its next move. The Philippines and Japan are others. The European Central Bank and Bank of England are also expected to announce they will keep their rates as early as this week.
Other countries have been slashing rates: Australia, Chile, China, Hungary, Norway, South Africa and South Korea have recently cut rates to ease borrowing costs. To be clear, all have different reasons, but a possible U.S. recession is near the top of each of their lists because they rely on this country to buy their exports.
But in hindsight, their decisions to keep, cut or raise rates now won't be as important as what they do with their rates after the U.S. Fed decides what to do. And the Bank of Canada knows this, as the "full update" of the Bank's outlook of growth and inflation and won't be released until Oct. 18.
That date is important for several reasons: It is two days after the Bank of Canada' next decision to raise or keep rates. And it's a full month after the U.S. Fed's next scheduled meeting (though it can act between meetings), which gives the Canadian central bank time to measure and act.