Bank of Canada holds rates, frets about trade war damage

OTTAWA: The Bank of Canada held interest rates steady and raised its second-quarter growth forecast as expected on Wednesday while highlighting the risks that trade wars posed to the global economy.

The central bank - which has sat on the sidelines since last October amid an economic slowdown - maintained its overnight rate at 1.75% and made no mention of future rate moves.

The bank raised its second quarter annualized growth estimate for Canada to 2.3% from 1.3%, in part because of temporary factors such as the reversal of weather-related softness and a surge in oil-exports. Higher consumer spending, a more stable national housing market and a rebound in exports in the second quarter also contributed to the gain.

The central bank's projection for second-quarter domestic growth was at the low end of the range of 2.25% to 3% forecast by analysts.

But the bank cut its forecast for 2019 global growth to 3.0% from 3.2% and 2020 global growth to 3.2% from 3.3% to take into account the damage being done by trade tensions, in particular the tariff war between China and the United States.

"Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks," it said, adding that the trade wars were curbing manufacturing activity and business investment while pushing commodity prices down.

Analysts said the cautious tone of the remarks made it clear the bank would remain on the sidelines for the time being.

"That was a pretty conservative upgrade given what we've seen in the data. So clearly the growing wave of negative sentiment around the globe is impacting the Bank of Canada's view on the outlook," said Andrew Kelvin, chief Canada strategist at TD Securities.

"They are going to take a cautious approach going forward. We continue to look for the Bank of Canada to cut interest rates in January 2020," he said by phone.

The Canadian dollar unwound its gains, touching 1.3143 to the US dollar, or 76.09 US cents.

The loonie has been the top performing G10 currency this year as traders bet the Bank of Canada will diverge from expected easing by the US Federal Reserve.

The bank warned that international trade disputes are having a "material effect on the global economic outlook."

In Canada, increased Chinese trade restrictions on canola and meat exports were estimated to reduce Canadian exports by 0.2% over the second and third quarters.