**Bank of Canada Preview: Steady Policy Amid Global Trade Headwinds**
*Adapted and expanded from the original article by James Smith, ING*
The Bank of Canada (BoC) is once again drawing market attention as it prepares for its latest interest rate decision. Despite global uncertainty and rising trade tensions, the central bank is widely expected to leave its policy interest rate unchanged. As global financial conditions fluctuate with each new policy statement from major central banks or geopolitical headlines, traders and analysts are trying to decipher whether the BoC will follow the dovish pivot made by its international counterparts.
This article delves into the reasons behind the BoC’s likely decision to remain on hold, the economic conditions influencing policy, and the broader implications for Canada’s currency and financial markets.
## Why the BoC is Likely to Keep Rates Steady
Canada’s economy has faced external pressures, notably from global trade tensions and the slowdown in key trading partners such as China and the eurozone. Still, the domestic backdrop has maintained a degree of resilience. The BoC’s current policy rate remains at 1.75 percent, and most economists expect it will stay there at least in the short term.
Some of the key factors supporting a “wait-and-see” approach include:
– **Domestic economic performance**: Although growth slowed at the start of the year, recent GDP data for the second quarter showed some encouraging signs. Canadian GDP grew by 3.7 percent annualized in Q2 of 2019, above market expectations, driven in part by a rebound in exports and inventory investment.
– **Labor market strength**: Canada’s job market remains one of the bright spots in the economy. The unemployment rate sits near a 40-year low, and wage growth has picked up, signaling ongoing tightness in the labor market.
– **Inflation dynamics**: Core inflation measures have remained close to the BoC’s 2 percent target, giving the central bank room to maintain its current rate without concerns about overheating or undershooting inflation.
– **High household debt**: Canada has one of the highest household debt-to-income ratios among G7 nations. Since Canadian households are particularly sensitive to interest rate changes, the BoC must tread carefully before considering any hikes.
James Smith of ING emphasized these domestic strengths, noting that while the BoC remains cautious about external risks, its posture differs from that of more universally dovish central banks like the U.S. Federal Reserve or the European Central Bank (ECB).
## Global Trade Tensions: The Key Downside Risk
Despite the relative domestic resilience, global trade tensions are the most significant challenge currently facing the Canadian economy.
– **U.S.-China dispute**: The ongoing trade war between Washington and Beijing has created a ripple effect across global markets. As a major exporter, Canada relies heavily on global trade for economic growth. Any slowdown in world trade or demand for exports directly affects Canadian manufacturers and exporters.
– **New U.S. tariffs**: In early September 2019, the U.S. introduced a fresh round of tariffs on another USD 112 billion of Chinese goods. There is concern about future waves of tariffs coming into force, and these will likely dampen global demand.
– **Uncertainty in USMCA ratification**: Although a new NAFTA agreement — the United States-Mexico-Canada Agreement (USMCA) — was completed in principle, political gridlock in the U.S. Congress delays its full ratification. This protracted uncertainty weighs on business investment in Canada, as firms postpone decisions on trade and capital expenditure.
These trade-related concerns have prompted many central banks globally to adopt a more dovish tone or enact rate cuts preemptively. The U.S. Federal Reserve lowered its benchmark interest rate in July 2019, marking its first cut in over a decade. The European Central Bank also signaled additional stimulus amid eurozone economic weakness.
The Bank of Canada, however, has charted a more stable course
Read more on USD/CAD trading.