(Bloomberg) --
The Bank of Canada left interest rates unchanged for a seventh straight decision and held off from signaling explicitly any immediate need to cut them.
At a rate decision Wednesday, policy makers said the escalating trade war between China and the U.S. has undermined global economic momentum more than projected in July. At the same time, growth in Canada so far has been stronger than expected and inflation on target, suggesting current levels of stimulus are where they should be, they said.
“In sum, Canada's economy is operating close to potential and inflation is on target. However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the central bank said in its statement. “In this context, the current degree of monetary policy stimulus remains appropriate.”
The Bank of Canada’s reluctance to signal a greater willingness to cut rates may come as a surprise to some investors and analysts who had been expecting more dovish language.
Wednesday's narrative does emphasize trade risks and reiterates that Canadian growth is likely to slow in the second half of this year -- all of which suggests policy makers are far from confident about the economic outlook and could be keeping the door open for cuts if things worsen.
But the net effect of the statement is a continuation -- at least explicitly -- of the central bank's reluctance to show its hand on whether it plans to join other central banks like the Federal Reserve in easing policy, preferring instead to wait for more concrete signs of weakness before moving.
Risky Strategy
It’s a risky strategy that could backfire if policy makers are late to recognize spillover effects on businesses and households, particularly since the country’s outlier status on policy could fuel gains in the Canadian dollar.
Bank of Canada officials said they will pay close attention to “global developments and their impacts on the outlook for Canadian growth and inflation.”
The case for cheaper money isn’t as compelling in Canada as it is elsewhere. A strong run of economic data affords the Bank of Canada opportunity to resist -- as it has so far -- the dovish turn in global policy.
Interest rates also remain stimulative in real terms, and borrowing costs have already declined sharply in the country because of falling global bond yields -- a development the Bank of Canada cited in its statement. But escalating tensions between China and the U.S. are getting tougher to overlook. Trump’s tariffs on imports from China have already become a major reason behind global factory weakness.
The Bank of Canada characterized Canadian second quarter growth of 3.7% annualized as “strong” but noted some of the strength was probably temporary and pointed out that consumption spending was unexpectedly soft.
©2019 Bloomberg L.P.