Canada: Bank of Canada holds policy rate at 0.50%, predicts Alberta fires will cut 1.25 percentage points from Q2 growth
May 25, 2016
At its 25 May policy meeting, the Bank of Canada (BoC) decided to maintain its target for the overnight rate at 0.50%. Although the move was in line with market expectations, there had been some discussion as to whether the Bank would cut rates in response to the disruption in oil output caused by the recent forest fires in Northern Alberta.
Regarding external developments, the BoC noted in its April Monetary Policy Report (MPR) that the global economy is evolving largely as expected. The U.S. appears to have put a weak start to the year behind it, and recent indicators suggest that it will register more robust growth in the remainder of the year. Oil prices have advanced steadily from the start of the year, due in part to production disruptions.
Canada’s adjustment to the oil price shock continues and it is having mixed effects across the country, with higher unemployment being registered in oil-producing regions. Although growth in Q1 was in line with April’s expectations, growth in Q2 will suffer from fire-related disruption in output. The BoC stated that it estimates that production cuts in Northern Alberta could shave about 1.25 percentage points off of Q2 GDP growth. The Bank had projected annual growth of 1.0% in Q2 in its April MPR, and therefore many analysts suspect that the BoC foresees a contraction in Q2. The Bank noted that the economy should rebound in the third quarter as oil output recovers and reconstruction of infrastructure begins.
Regarding price movements, inflation has been largely stable and in line with the projections made in the April MPR. The BoC emphasized that the effects of exchange rate depreciation and excess capacity in the economy are offsetting each other, resulting in core inflation remaining stable at around 2.0%.
The BoC concluded by stating that, “Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy.” It also stated that household vulnerabilities, such as household debt levels, have inched higher. Overall, according to the BoC, risks to inflation are currently balanced. The next monetary policy meeting is scheduled for 13 July.
Author: Robert Hill, Economist