Canada Monetary Policy September 2016

Canada

Canada: Bank of Canada leaves policy rate unchanged despite Q2's dismal GDP figures

September 7, 2016

At its 7 September policy meeting, the Bank of Canada (BoC) decided to keep its target for the overnight rate unchanged at 0.50%, where it has been since July 2015. Although the decision was largely in line with market expectations, there had been some speculation as to whether the Bank would cut rates in response to Q2’s dismal GDP figures—resulting from the Alberta wildfires and depressed oil prices.

However, in its statement, the Bank of Canada said that it still projects a substantial rebound in H2 as oil production recovers, rebuilding starts in Alberta and consumption gets a boost from the Canada Child Benefits program. The Bank also added that, “as federal infrastructure spending starts to have more impact, growth in the fourth quarter is projected to remain above potential. While the strength in exports during July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July.” Following the Central Bank’s statement, Brian DePratto, Economist at Toronto-Dominion Bank said further easing looked unlikely:

“The dovish tone from the Bank of Canada will likely have market participants re-examining the possibility of an interest rate cut. We remain of the view that absent material disappointment in exports, further easing is unlikely. The more likely scenario is a continued dovish tone from the Bank of Canada, reinforcing that the policy rate is not likely to be moved in the foreseeable future. Consistent with this, our forecast calls for the Bank of Canada to remain on hold throughout 2017 and 2018.”

In terms of the global economy, the Bank mentioned growth was slower in H1 2016 but that it still expects it to recover gradually during the second half of 2016. Similarly, despite the U.S.’ weaker-than-expected growth in Q2, the Bank believes the country’s healthy labor market and robust consumption will support growth in H2. It also pointed out that global financial conditions have become more accommodative since the last monetary policy meeting in July.

Regarding consumer price movements, the Monetary Authority stated that inflation remains in the lower bound of the 2.0% plus/minus 1.0 percentage point target range. According to its July Monetary Policy Report, the Bank estimates that inflation will return to 2.0% in 2017 as the output gap narrows. However, this month the BoC emphasized that, “risks to the profile for inflation have tilted somewhat to the downside since July. At the same time, while there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise.”

The next monetary policy meeting is scheduled for 19 October. 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 that time.

FocusEconomics Consensus Forecast panelists see the policy rate at 0.49% at the end of 2016. For 2017, panelists expect the policy rate to rise to 0.76%.


Author:, Economist

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Canada Monetary Policy Chart


Canada Monetary Policy September 2016 0

Note: Target for the Overnight Rate in %.
Source: Bank of Canada (BoC).


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