Canada: Bank of Canada holds policy rate at 0.50% in March meeting
March 9, 2016
At its 9 March policy meeting, the Bank of Canada (BoC) decided to maintain its target for the overnight rate at 0.50%. The decision was largely anticipated by markets, which had expected the BoC to adopt a wait-and-see approach ahead of the Government’s 2016 budget presentation on 22 March. Although growth is still comparatively sluggish, recent data had suggested that growth in some sectors was starting to pick up, and the Bank was reluctant to move ahead of the fiscal measures released with the budget.
In its accompanying statement, the Bank noted that the global economy is moving largely as predicted in its January’s Monetary Policy Report. Concerns over financial market volatility have subsided somewhat as markets appear to have stabilized after several hiccups at the onset of 2016. The Bank expects global growth to strengthen over 2016 and 2017, as the U.S. economy continues to demonstrate stable growth. Canada and other energy exporting countries will continue to bear the brunt of decreased oil prices going forward.
The Canadian dollar has strengthened in early March, following a rally in commodity prices in late February. This rally has pushed up the price of commodes, including oil, to levels forecast in January’s Monetary Policy Report. This translates into Canadian short-term economic growth progressing in line with January’s forecasts as well. Household spending continues to be the mainstay of domestic demand, whereas business investment remains a soft spot in the economy due to weakness in the resource sector.
Along with other macroeconomic indicators, inflation is evolving as expected. The relatively high level of inflation recorded in January, softened in February, and will likely continue to do so in the coming months. The Bank sees core inflation close to its 2.0% target, thanks to higher prices for imports stemming from the weak Canadian dollar. Excess capacity in the economy is also putting downward pressure on inflation.
The BoC noted that it will incorporate the federal budget’s stimulus measures into its April projections. The Bank elaborated that risks to inflation were balanced, stating “financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy.” The next monetary policy meeting is scheduled for 13 April.
Author: Robert Hill, Economist