Canada: Bank of Canada holds policy rate at 0.50%, lowers growth forecasts
October 19, 2016
At its 19 October policy meeting, the Bank of Canada (BoC) decided to maintain its target for the overnight rate at 0.50%, despite a weaker inflation and growth outlook. Although the decision was in line with market expectations, BoC Governor Stephen Poloz acknowledged that the Bank had considered an interest rate cut given the bleak forecast for Canada’s export-led economy. In the end, the Central Bank decided to leave the trendsetting rate unchanged due to significant uncertainties about a host of issues such as the effect of new and tighter mortgage rules and the impact of the federal government’s new spending program on the economy.
The BoC revised its 2016 and 2017 economic growth projections downwards from 1.3% and 2.2%, to 1.1% and 2.0%, respectively. The outlook for 2018 GDP was left unchanged at 2.1%. The cuts in the GDP forecasts were driven by a number of factors including weaker-than-expected exports, disappointing U.S. business investment and an expected deceleration of the housing market as a result of the new, federally-mandated mortgage measures.
In terms of the global economy, the BoC expects it to pick up again in the second half of this year and through 2017 and 2018. It also highlighted that, despite a weak performance in H1, the U.S. economy seems to have been improving recently thanks to robust employment growth and strong consumer confidence, though heightened uncertainty is keeping U.S. business investment subdued.
Regarding inflation, the BoC stated that core inflation remains close to 2.0%, while total CPI is falling slightly short of expectations due to temporarily low prices for gasoline, food and telecommunications. The Bank expects inflation to be around 2.0% in 2017, as the afore-mentioned factors fade but the output gap persists, keeping downward pressure on inflation.
The BoC concluded its accompanying statement by saying that, “the Bank considers the risks around its updated inflation outlook to be roughly balanced, albeit in a context of heightened uncertainty” and “the overall balance of risks is still in the zone for which the current stance of monetary policy is appropriate.” The Bank made no mention of future easing and did not offer any hints in terms of forward guidance. The next monetary policy meeting is scheduled for 7 December.
Author: Luis Lopez Vivas, Economist