Canada: Bank of Canada holds policy rate at 0.50% in April
April 12, 2017
On 12 April, the Bank of Canada (BoC) left its target for the overnight rate at 0.50%, where it has been since July 2015. The decision to leave rates unchanged was widely expected by market analysts. In the accompanying monetary policy report, the Bank also revised its 2017 GDP forecast up to 2.6% (previously: +2.1%) and its 2018 GDP forecast down to 1.9% (previously: +2.1%).
Although recent economic indicators for Q1 suggest impressive economic growth so far this year, the Bank struck a downbeat tone as it questioned whether the current trajectory is sustainable in the medium term given the numerous downside risks facing the economy. While the energy sector has seen a comeback from last year’s wildfires and low oil prices, export growth and business investment has been persistently weak. Meanwhile, consumer spending has been on the rise but has been largely fueled by debt. Soaring speculation in the Toronto housing market—which has seen prices climb more than 30% in the past year—has been a boon for households, but the stunning rise could experience a correction if the market overheats. Highly cautious of jumping the gun, the Bank pointed to falling core inflation in recent months as it stuck to its long-held view that the economy is not yet out of the woods. That assessment was bolstered by the transiency of some of the recent positive economic data, notably the effects of the Canada Child Benefit act and higher commodity prices.
While the Bank now sees significantly stronger growth this year, it made clear that the economy still faces considerable hurdles including global competitiveness, labor productivity and the potential rise of trade protectionism. While specific forward guidance was absent from the statement, the revised expectation that the output gap could close as early as H1 2018 suggests that the Bank could pull forward rate hikes. In the short term, the Bank’s noted caution will put it at odds with the U.S. Federal Reserve and any additional monetary tightening south of the border this year.
The next monetary policy announcement is scheduled for 24 May.
Author: Christopher Thomas, Economist