Canadian Dollar Weakens As BoC Holds Rates Steady

The Bank of Canada, at its monetary policy meeting yesterday decided to hold the interest rates steady at 0.50%, as widely expected. Stephen Poloz, the BoC’s governor, said that there were significant uncertainties that weighed out the outlook for Canada’s economy, opting to keep interest rates steady.

The BoC’s meeting comes hot on the heels of latest inflation figures. Data from Statistics Canada showed that inflation rate rose 2.1% in January. But the positive data did not reflect much in the BoC’s statement. The central bank, on the other hand, cautioned that with the exception of higher energy prices that came as a result of higher carbon taxes in two of Canada’s provinces, the actual cost of living in the country was rising at a much slower rate.

The central bank’s statement said that it was looking past these effects which it termed as being temporary, in reference to the carbon taxes and higher energy prices and pointed out the material excess capacity in the economy.

 

Canada interest rates, March 2017: 0.50%

The Bank of Canada also highlighted the growing divergence with the U.S. economy on aspects of wage growth and a number of hours worked. “Subdued wage growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States,” the statement said. This comes after employment data for January showed that the unemployment rate fell to 6.8% with the economy seen adding 48.3k jobs during the month. Most of the job gains came from the part-time sector, which grew nearly double that of full-time jobs. Despite the positive headline print, the Canadian labor market has remained very volatile with the unemployment rate posting sharp swings.

Overall, the labor market in Canada was quite resilient during the second half of 2016 despite the fact that hiring came mostly from part-time jobs, which is a very compelling reason for the Bank of Canada to hold interest rates steady. However, the BoC’s statement maintained the view that there was significant labor market slack in the unemployment rate indicating that it expects to see further increase in wages which has remained slow, compared to the pace of increase in inflation.