Canada dollar to rebound in 2019, supported by higher rates

USD/CAD Daily Price Forecast - Loonie Continues To Gain Momentum Over Spike In Crude Oil Price

USD/CAD Daily Price Forecast - Loonie Continues To Gain Momentum Over Spike In Crude Oil Price

With global economic growth projected to slow down in 2019 and increasing signs that the U.S.

The Bank of Canada is holding interest rates steady as the economy navigates a temporary period of softness created by the sharp drop in oil prices, governor Stephen Poloz said Wednesday.

"As the snow melts, we'll have a clearer view that the economy is back on track and then likely to grow above or around two per cent after that", Poloz told reporters after announcing the bank would keep its benchmark interest rate at 1.75 per cent.

The bank's benchmark rate directly affects the interest rates that Canadian consumers get from their retail banks on their mortgages, loans or on their savings deposits.

"The general thesis here is that the bank has a bit more work to do on the rate front", said Shaun Osborne, chief currency strategist at Scotiabank, who also expects the price of oil to rebound and the US dollar to weaken. The central bank's statement released along with the decision had a slight dovish tone.

"The roller coaster ride of the past few months has brought a note of greater caution to the Bank of Canada's communications, and today's decision looks to be an extension of that", DePratto wrote in a research note to clients.

USDCAD pair is trading in red for sixth consecutive trading session today underpinned by increased risk on trading activity in global markets and bounce in crude oil price. The economic impact of the decline is expected to be about one-quarter as large as the 2014-16 oil-price shock, the bank said. These worries among market participants have also been reflected in bond and equity markets. Back in November 2018, traders expected three.

Nevertheless, the Canadian economy that has been performing well overall, the bank said.

"Our base case is that the economy will grow above potential this year and next".

The bank said it expects exports and non-energy investment to grow solidly, supported by foreign demand, the newly renegotiated free trade agreement with the US and Mexico, the lower Canadian dollar, and federal tax measures targeted at investment.

It's now projecting growth to be just 1.7 per cent in 2019, down from its October forecast of 2.1 per cent - but it remains optimistic the economy will begin to strengthen again as early as the second quarter of this year.

Inflation is expected to dip temporarily below the central bank's guiding 2 percent target for much of this year, largely because of the effect of lower energy prices.

The bank held its overnight interest rate at 1.75 percent, well below the "neutral" rate of 2.5 percent to 3.5 percent, where monetary policy is neither stimulative or accommodative.

The timing of its next hike will depend on several factors, the bank said, and there will be a particular focus on developments in the oil markets, the Canadian housing sector and global trade policy.