Canada: Bank of Canada holds policy rate at 0.50%, lowers growth forecasts
July 13, 2016
At its 13 July policy meeting, the Bank of Canada (BoC) decided to maintain its target for the overnight rate at 0.50%. Although market participants had expected the Bank to decide to hold the overnight rate steady, analysts had also thought that the Bank would offer hints of future easing in its accompanying statement. However, the Bank appears steadfast in its policy stance and did not reveal an inclination toward future rate cuts.
In light of economic setbacks, the BoC revised its 2016 and 2017 growth projections downward from 1.7% and 2.3%, to 1.3% and 2.2% respectively. The sharp cut in the 2016 GDP forecast was driven by a number of factors, including the Alberta wildfires, which amounted to a production disruption of about 40 million barrels in total. According to the BoC’s calculation, the production disruption lowered Q2 GDP growth by 1.1 percentage points, resulting in an unexpected 1.0% contraction. The Bank also took into account weak consumer spending and subdued non-energy exports when revising the forecast. Canada’s prolonged economic adjustment that is aimed atshift activity from the resource sector to services and manufacturing is still underway and has been impeded by reduced global demand. Although the implications of the Brexit vote are far from clear at this juncture, the BoC has stated the uncertainty stemming from the referendum could have ramifications for business investment and household consumption for some time.
Regarding inflation, the Bank of Canada has stated that inflation remains in the lower half of the 2.0% plus/minus 1.0 percentage point target range. The Bank expects inflation to return to 2.0% in 2017 as the output gap narrows. However, the BoC pointed out that risks to inflation persist, including weaker-than-expected household expenditure and subdued business investment, slower global growth and shifts in oil prices.
The BoC concluded its accompanying statement by stating that, “the risks to the profile for inflation are roughly balanced, although the implications of the Brexit vote are highly uncertain and difficult to forecast.” The Bank made no mention of future easing and did not offer any hints in terms of forward guidance. Although the BoC has traditionally not made its forecast interest rate movements public, some analysts found it noteworthy that, given the downward revision to the 2016 growth forecast/projection and weak prospects for the global economy, more dovish language was not used in the accompanying statement. The next monetary policy meeting is scheduled for 7 September.
Author: Robert Hill, Economist