Bank of Canada stands pat on key rate, cites impact of January cut

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The chance of another interest rate cut is fading fast as Bank of Canada Governor Stephen Poloz shows growing confidence that the economy is on the mend, thanks in part to his surprise January move.

The central bank left its key overnight interest unchanged at 0.75 per cent Wednesday, indicating it is continuing to deliver an “appropriate” monetary stimulus to counter the economic damage caused by the oil price plunge.

“At present, we judge that the current degree of monetary stimulus is still appropriate,” the central bank said in a statement, noting that inflation risks are now “more balanced.”

The central bank pointed out that financial conditions have improved markedly since January, the Canadian dollar has fallen and economic conditions are unfolding largely as anticipated.

“Financial conditions have eased materially since January,” it said. “This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar.”

And yet many economists are reluctant to completely rule out another rate cut, worried about being caught off-guard by the central bank’s evolving public statements and Mr. Poloz’s determination not to tip his hand.

“We would be careful in allowing ourselves to be led by a central banker who has explicitly spoken out against forward guidance,” warned Bank of America Merrill Lynch economist Emanuella Enenajor. “We still see risks that the [Bank of Canada] eases this year.”

The decision to hold rates steady comes six weeks after the bank shocked financial markets with a quarter-percentage-point cut on Jan. 21.

Mr. Poloz continues to surprise investors. On Wednesday, financial markets were pricing in a roughly 24-per-cent chance of another quarter-point rate cut when the bank makes its next rate announcement April 15. As recently as last week, the likelihood of a second rate cut was 70 per cent. On Tuesday, it was about 50 per cent.

The chance the bank will cut again is now more remote, but Mr. Poloz could well move if oil starts plunging again or inflation dives lower, Bank of Montreal chief economist Douglas Porter said.

“This does not fully close the door of the possibility of further rate cuts,” Mr. Porter said.

Royal Bank of Canada economist Mark Chandler said Wednesday’s statement suggests the bank may be “one and done,” satisfied that its January reduction was enough.

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