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Bank of Canada Holds Rates Steady as U.S. Tariff Plan Weighs on Outlook -- Update

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03/07/2018 | 05:37pm CEST

By Kim Mackrael

OTTAWA -- The Bank of Canada on Wednesday left its benchmark interest rate unchanged at 1.25% as it warned that trade policy developments are leading to more uncertainty for Canada's economic outlook.

"In the United States, new government spending and previously announced tax cuts are anticipated to boost growth in 2018 and 2019," the central bank's governing council said in a statement. "However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks."

The decision to stand pat was widely anticipated by economists, with many saying that worries over Canada's trade ties with the U.S. reinforced their expectations that the central bank wouldn't make any policy changes. U.S. President Donald Trump last week announced plans for global tariffs on steel and aluminum, a move he later connected to continuing efforts to renegotiate the terms of the North American Free Trade Agreement.

Canada sends roughly three quarters of its exports to the U.S., representing 20% of total economic output, so any disruption in trade between the two countries could have a significant impact on the Canadian economy.

The central bank said Wednesday that Canada's economy grew 3% in 2017, matching its earlier projection, but noted that growth in the fourth quarter was slower than anticipated. Some of the weakness in the quarter was due to higher imports, the bank said, which mainly reflected stronger business investment.

Other recent economic data has been discouraging: January's trade report, also released Wednesday, revealed a sharp drop in both exports and imports in January, with export volumes plunging 3.6% for the biggest decline in four years. The Canadian economy also dropped a net 88,000 jobs in January, and a Statistics Canada survey released last week suggested business investment could slow considerably this year.

"Cooling growth left little reason for central bankers to rush another rate hike, but U.S. steel and aluminum tariffs sealed the deal," CIBC World Markets economist Royce Mendes said after the rate decision was released. He said CIBC anticipates just one more interest-rate increase in 2018.

The Bank of Canada has raised its key rate three times since mid-2017, most recently in January. On Wednesday, it said that while the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation likely will be needed.

Inflation is running close to the Bank of Canada's 2% target, it said on Wednesday, while measures of underlying inflation have edged up, suggesting the economy is operating near capacity. The central bank said inflation data is fluctuating because of temporary factors linked to gasoline, electricity and recent changes to minimum-wage laws in some regions.

Write to Kim Mackrael at kim.mackrael@wsj.com

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