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Report on Business Bank of Canada holds rates but says recent economic slump easing

The Bank of Canada says a run of good economic news has bolstered its conviction that the country is pulling out of its recent swoon.

The central bank nonetheless kept its key interest rate unchanged on Wednesday at 1.75 per cent and gave no indication that it’s poised to resume hiking it any time soon.

The bank laid out a good-news, bad-news narrative to justify its decision to stand pat. The economy is improving on the home front, but escalating trade tensions are weighing on future prospects, Bank of Canada Governor Stephen Poloz and central bank colleagues said in a statement accompanying the announcement.

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“Recent data have reinforced [the bank’s] view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased,” the bank said.

“In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate.”

It marks the fifth straight time the bank has kept its key rate unchanged after a series of hikes in 2017 and 2018.

Once again, the bank made no mention of trying to get its key rate back to “neutral” – the point when interest rates neither spur economic growth, nor slow it down. The bank’s estimate of neutral is 2.25 per cent to 3.25 per cent.

Many economists now expect the central bank to hold off on raising rates for the rest of the year, barring a dramatic improvement in economic conditions. The Canadian dollar weakened slightly immediately after Wednesday’s announcement.

“The statement doesn’t explicitly warn of rate hikes to come … but has an optimistic tone about what lies ahead, leaving the impression that the bank sees the next move as a hike, if well down the road,” CIBC chief economist Avery Shenfeld said in a research note.

Laurentian Bank Securities chief economist Sébastien Lavoie said the bank’s optimistic tone should likewise quell speculation about a possible rate cut in the coming months. “Investors considering the idea of a policy rate cut should reconsider their position,” he said.

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The tone of the latest statement was mostly upbeat, with the exception of the bank’s note of caution about the threat to growth from rising protectionism.

The bank said there is “accumulating evidence” that the economy bounced back in the second quarter. It cited a long list of positive signs, including the “beginning” of a recovery in the oil sector, a “more stable” national housing market, continued strong job growth, a pick-up in consumer spending, higher exports and a firming in business investment.

The bank also said the recent removal of steel and aluminum tariffs between Canada and the United States, combined with growing momentum to ratify the renegotiated North American free-trade agreement, has brightened the outlook for exports and investment.

That optimism was tempered by its angst about rising global trade strife, particularly between the United States and China. The bank says the “escalation of trade conflicts is heightening uncertainty about economic prospects” and that new Chinese trade restrictions are having “direct effects” on Canadian exports.

The Chinese government has imposed a virtual ban on imports of Canadian canola after finding what it says were weed seeds in recent shipments – allegations Canadian officials deny. The restrictions have dramatically curtailed a more than $4-billion-a-year export market for Canadian farmers.

Meanwhile, the United States and China have ratcheted up their trade showdown in recent weeks, imposing new tariffs on hundreds of billions of dollars of goods. The United States is also taking direct aim at China’s tech sector, blocking U.S. companies from doing business with Huawei Technologies Co. Ltd. over concerns about espionage.

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Despite Wednesday’s upbeat tone regarding the domestic economy, the Bank of Canada remains significantly more pessimistic than most private-sector forecasters. In April, the bank downgraded its estimate of growth this year to 1.2 per cent, down from 1.7 per cent. It also said the economy would grow at an annual rate of just 0.3 per cent in the first three months of the year.

The bank’s next rate announcement is on July 10. It will also release its updated forecast at that time.

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