Canada: Bank of Canada leaves policy rate unchanged in October
October 21, 2015
At its 21 October monetary policy meeting, the Bank of Canada (BoC) decided to leave the overnight rate unchanged at 0.50%. The move follows surprise rate cuts in July and January of this year, and was largely anticipated by the market, which adjusted expectations following the 19 October federal election outcome. The newly-elected Liberal Party government has signaled that it would use expansionary fiscal policy to stimulate growth, taking some of the pressure off the Bank to cut rates again this year.
The BoC stated that global economic activity had been somewhat weaker than expected in 2015. China’s slowdown has had a negative impact on demand for commodities and has put downward pressure on prices as a result. This has weighed on economic growth in commodity-exporting countries. The impact of cheaper energy prices and the broadly-accommodative monetary policies of major economies should become apparent in 2016 and 2017. The United States is also expected to continue to grow at a solid pace. Such a scenario would have an expansive effect on the Canadian export sector.
On the domestic front, thanks in part to the BoC’s stimulatory policy stance, Canada has shown signs of recovery after being hit by last year’s oil price shock. The economy still relies heavily on household spending, which is expected to increase going forward. However, low levels of business investment, particularly in the energy sector, and diminished resource exports have impacted Canada’s terms of trade and consequently dragged on the country’s growth prospects. This has led to the Bank revising downward its 2016 and 2017 growth forecasts to 2.0% and 2.5% from 2.3% and 2.6%, respectively.
Regarding prices, the BoC noted that inflation has largely followed the path outlined in its July Monetary Policy Report. Inflation continues to languish at the lower level of the Bank’s target range as pressures from low energy prices persist. Core inflation is closer to the Bank’s target of 2.0%, as pass–through effects from the lower Canadian dollar has offset the downward pressure on prices stemming from excess capacity in the economy.
The decline in business investment and weak terms of trade will drag on growth over the next year and a half. The Bank expects the economy to return to full capacity by mid-2017. Risks stemming from the household imbalances are evolving as expected. As a result, the BoC has deemed the current policy stance appropriate. The next policy meeting is scheduled for 2 December.
Author: Robert Hill, Economist