OTTAWA, April 18(Xinhua) -- The Bank of Canada announced Wednesday that it will keep its interest rate unchanged at 1.25 percent due to weakness in housing, trade and investment in export-oriented sectors.
Though many of the key ingredients for higher rates are falling into place, the bank said it remains "cautious with respect to future policy adjustments."
The central bank has raised its key rate three times since last June. And investors and economists still expect at least one more increase this year.
The bank's go-slow stance on rate hikes is because the economy's capacity to grow is also expanding. The bank boosted its estimate of potential output growth by two to four percentage-points in each of 2018, 2019 and 2020, according to its latest Monetary Policy Report issued Wednesday.
The Canadian economy is now expected to grow at an annual rate of 1.3 percent in the first three months of this year, down from the 2.5 percent the bank forecast in January.
For 2018, the bank wanted to see the economy grow two percent, down from a previous estimate of 2.2 percent. But growth will be a bit stronger than expected in 2019 and 2020, at 2.1 percent and 1.8 percent respectively, reflecting federal and provincial fiscal measures, said the bank.
"Both exports and investment are being held back by ongoing competitiveness, challenges and uncertainty about trade policies," it said.
Meanwhile, tighter federal mortgage rules, introduced in January, are weighing on housing activity, particularly in the once-booming Toronto market.
It added that some of that weakness in housing and exports will be unwound later in the year.
The bank also warned that escalating geopolitical and trade conflicts risk undermining the global expansion.
In recent weeks, the tit-for-tat moves on trade disputes between the United States and China have sparked fears of a damaging global trade war between the world's two largest economies. The future of the North American free trade agreement also remains unclear because many contentious issues remain unresolved.
And inflation is perking up. The bank said it now expects the consumer price index to rise 2.3 percent this year, versus a previous estimate of two percent. The bank said inflation will be 2.1 percent in both 2019 and 2020.
The bank also expressed other main worries, including a hit to heavily indebted borrowers from higher interest rates as well as a sizeable decline in house prices in some markets. On the upside, the U.S. economy could grow faster than expected, boosting demand for Canadian exports.
