Canadian dollar drops as Bank of Canada holds overnight rate steady

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The Bank of Canada has chose to keep its benchmark interest rate steady at 1 per cent.

Bank of Canada Governor Stephen Poloz said he believed the economy was in a "sweet spot", generating more growth than expected but less inflation - a dovish turn for the central bank after back-to-back rate hikes in July and September. The central bank sets rate policy to hit and maintain 2% inflation.

Canada's economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors.

However, the bank added, "While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate".

In a September 27 speech, Bank of Canada Governor Stephen Poloz indicated that he didn't think the economy was at full capacity and that the central bank would be more patient in raising rates, barring another out-performance in economic data.

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The bank says that while the economy is now running close to capacity, inflation won't get back to its two per cent target until the second half of next year because of the recent strength of the Canadian dollar.

But the bank said it has chosen not to fully quantify the potential damage to Canada's economy and export prospects until it has more clarity about what will happen. Annualized growth should pick up to 2.5% in the final three months of the year.

The bank pointed out that it will be closely watching several key pieces of incoming data, including wage growth and the response of consumers and businesses to recent rate hikes. Growing protectionist pressures in the US and competitiveness challenges could prompt Canadian firms to move production capacity overseas to offset the risk, the central bank said. The Bank still expects global growth to average around 3 1/2 per cent over 2017-19.

The BoC does expect OSFI's new rules to subtract 0.2 percent from GDP by the end of 2019.

Holding the overnight interest rate steady in its October 25 announcement, the Bank of Canada warned that future rate hikes would be likely, although at a more tentative pace than previously anticipated. The "uncertainty around the outcome of NAFTA renegotiations is elevated", the bank said.

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