Canada: Bank of Canada holds policy rate at 0.50% in December
December 7, 2016
At its 7 December policy meeting, the Bank of Canada (BoC) decided to maintain its target for the overnight rate at 0.50%, where it has been since July 2015. The decision was largely in line with market expectations, due to better economic conditions both at home and abroad.
According to the BoC, recent economic data point to a recovery in global economic conditions, as it had projected in its October Monetary Policy report. Despite this improvement, the Bank warns that there has been an increase in uncertainty which has hampered business confidence and investment in Canada’s main trading partners. Meanwhile, Canadian bond yields have increased as the market anticipates an expansionary fiscal policy under Trump’s administration.
In terms of the economy, the Bank highlighted Q3’s expected strong rebound following the recovery from the Fort McMurray wildfires. However, a milder rate of expansion is expected for Q4. Consumption growth also helped fuel Q3’s robust figure as it was bolstered by the new Canada Child Benefit program, which is part of a broader federal stimulus package. The Bank expects Canada’s volatile housing market to cool thanks to changes in housing finance rules.
Regarding inflation, the BoC stated that it has increased in recent months, but it is still falling short of expectations, mostly due to lower prices for food. Meanwhile, core inflation remains close to 2.0% as the persistent output gap is being counterbalanced by exchange rate depreciation, although the latter effect is fading quickly.
The next monetary policy meeting is scheduled for 18 January 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will also be published in the Monetary Policy Report at the same time.
Author: Luis Lopez Vivas, Economist