Trade Conflicts, Oil Weakness Cloud Future Rate Hikes

Not only did the Bank of Canada not raise its overnight lending rate on Wednesday, it seemed to suggest future hikes may not come as quickly as previously expected.

Holding the rate at 1.75%, the Bank warned in its accompanying statement that signs are emerging that trade conflicts – primarily between the U.S. and China – are ‘weighing more heavily on global demand.’

The sharp drop in oil prices was also cited by the Bank, with heavy supplies and transportation constraints adding to the woes in the Canadian oil patch. “In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected,” it said.

Although today’s statement indicated the Bank still believes rates will need to rise into what it describes as a neutral range – possibly somewhere between 2.5% and 3.5% - the timing will depend on a number of factors, including global trade policy developments and the persistence of the oil price shock. The Bank last increased its overnight rate in October, bumping it a ¼ point higher – the fifth such increase since mid-2017.

Some analysts speculated the Bank’s next rate increase now might not come until the spring, rather than in January, as was previously expected.

Although the Bank’s decision to hold its rate steady today was widely expected, the Canadian dollar nevertheless fell about a half a cent when the announcement came out this morning, slipping below the 75-cent US level to its lowest level since May 2017.

Rising interest rates are having an impact on Canadian producers, with farm interest-related expenses reported up 6.8% in 2017, according to Statistics Canada.

Source: DePutter Publishing Ltd.

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