Canada: Bank of Canada surprises analysts, cuts rate in July
July 15, 2015
At its 15 July monetary policy meeting, the Bank of Canada (BoC) cut the overnight rate by 25 basis points from 0.75%, to 0.50%. The decision surprised market analysts who had expected the Bank to maintain the policy rate at 0.75%, where it has been since January.
The BoC stated that although global growth was meagre in the first half of 2015, there were indications of a rebound in the U.S. that should continue through the rest of the year. Conversely, China appears to be transitioning to a more stable growth path, which has had an impact on certain commodity exports, including Canadian exports. Global monetary policy continues to be accommodative, which the Bank sees supporting economic activity throughout the remainder of the year. This support is countering the downward pressure on prices that is stemming from excess capacity, particularly in the labor markets of advanced economies. At home, the output gap widened in the first half of 2015, which has impacted both unemployment and wage growth, particularly in oil-producing provinces.
Regarding price developments, the BoC noted that inflation has been stable at around 1.0% in recent months as slack in the economy and year-over-year price declines in gasoline and consumer energy products continue to put downward pressure on inflation. These factors are being offset somewhat by the depreciation in the Canadian dollar as well as by some sector-specific factors. The Bank sees an underlying inflation trend of approximately 1.5% to 1.7%. The decision to lower rates came as a result of increased downside risk to inflation via a larger output gap. Although a lower policy rate may fuel household imbalances, the Bank maintained that the monetary stimulus is needed to help close the country’s output gap and return to a suitable inflation target. The next monetary policy meeting is scheduled for 9 September.
Author: Robert Hill, Economist