Canadian Underwriter

Bank of Canada maintains interest rate at 0.5%

October 19, 2016   by Canadian Underwriter

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The Bank of Canada announced on Wednesday that it is maintaining its interest rate target at 0.5%, while downgrading its growth outlook for the country.

Business graphThe central bank expects Canada’s real gross domestic product (GDP) to grow by 1.1% in 2016 and about 2% in both 2017 and 2018. “This projection implies that the economy returns to full capacity around mid-2018, materially later than the bank had anticipated in July,” the Bank of Canada said in a statement.

Looking through the “choppiness of recent data,” the profile for growth in Canada is now lower than projected in July’s Monetary Policy Report, the bank reiterated, due in large part to slower near-term housing resale activity and a lower trajectory for exports. While recent export data are improving, they are not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar’s past depreciation. “Growth in exports over 2017 and 2018 are projected to be slower than previously forecast, due to lower estimates of global demand, a composition of U.S. growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms,” the statement said.

After incorporating these weaker elements, Canada’s economy is still expected to grow at a rate above potential starting in the second half of 2016, supported by accommodative monetary and financial conditions and federal fiscal measures.

As the economy continues to adjust to the oil price shock, investment in the energy sector appears to be bottoming out, the Bank of Canada reported. Non-resource activity is growing solidly, particularly in the services sector.

In addition, the global economy is expected to regain momentum in the second half of this year and through 2017 and 2018. After a weak first half, the United States economy in particular is strengthening: solid consumption is being underpinned by strong employment growth and robust consumer confidence. However, because of elevated uncertainty, U.S. business investment is on a lower track than expected, the central bank said.

Measures of core inflation remain close to 2% as the effects of past exchange rate depreciation and excess capacity continue to offset each other. Total consumer price index (CPI) inflation is tracking slightly below expectations because of temporary weakness in prices for gasoline, food and telecommunications. The bank expects total CPI inflation to be close to 2% from early 2017 onwards, when these temporary factors will have dissipated, but downward pressure on inflation will continue while economic slack persists.

The next scheduled date for announcing interest rates is Dec. 7. The next full update of the bank’s outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report on Jan. 18, 2017.

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