By CentralBankNews.info
Canada’s central bank left its benchmark target for the overnight rate unchanged at 0.5 percent, as expected, and trimmed its growth and inflation forecasts.
The Bank of Canada (BOC), which has cut its rate twice this year by 50 basis points, added that the risks to inflation were “roughly balanced” and risks to financial stability were as expected although the risks to households’ financial situation had edged higher.
While it acknowledged that global growth had been weaker than expected this year, the BOC said “the dynamics pointing to a pickup in 2016 and 2017 remain largely intact” when the positive effects of cheaper energy and easy financial conditions should become increasingly evident.
Solid growth in the United States will continue to help Canada’s exports and signs of a rebound in the country’s non-resource sectors are also becoming “more evident” helped by the decline in the exchange rate of the Canadian dollar and past rate cuts, the BOC said.
In its monetary policy report, the BOC maintained its forecast for Gross Domestic Product growth for the fourth quarter of this year at 0.7 percent while the forecast for Q4 2016 was lowered to 2.5 percent from 2.8 percent forecast in July.
For Q4 2017 the forecast was cut to 2.2 percent from 2.3 percent, with the BOC expecting the country’s economy to return to full capacity, and inflation at its 2.0 percent target, by mid-2017.
Inflation has evolved largely as the BOC forecast in July with the forecast for consumer price inflation steady at 1.4 percent for the fourth quarter of this year. But for 2016 the inflation forecast was lowered slightly to 1.6 percent in the fourth quarter from a previous 1.9 percent. For 2017 inflation is seen averaging 2.0 percent in all four quarters.
Canada’s headline inflation rate was steady at 1.3 percent in August and July while GDP expanded by an annual 1.0 percent in the second quarter, down from 2.0 percent in the first quarter.
The Bank of Canada issued the following statement:
“The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Inflation has evolved in line with the outlook in the Bank’s July Monetary Policy Report (MPR). Total CPI inflation remains near the bottom of the Bank’s target range, owing to declines in consumer energy prices. Core inflation is close to 2 per cent as the transitory effects of the past depreciation of the Canadian dollar are roughly offsetting disinflationary pressures from economic slack, which has increased this year. The Bank judges that the underlying trend in inflation continues to be about 1.5 to 1.7 per cent.
Global economic growth has been a little weaker than expected this year, but the dynamics pointing to a pickup in 2016 and 2017 remain largely intact. Uncertainty about China’s transition to a slower growth path has contributed to further downward pressure on prices for oil and other commodities. These factors are weighing on growth in many emerging markets and some other economies. Looking ahead to 2016 and 2017, the positive effects of cheaper energy and broadly accommodative financial conditions should become increasingly evident. In the United States, the economy is expected to continue growing at a solid pace with particular strength in private domestic demand, which is important for Canadian exports.
Canada’s economy has rebounded, as projected in July. In non-resource sectors, the looked-for signs of strength are more evident, supported by the stimulative effects of previous monetary policy actions and past depreciation of the Canadian dollar. Household spending continues to underpin economic activity and is expected to grow at a moderate pace over the projection period. However, lower prices for oil and other commodities since the summer have further lowered Canada’s terms of trade and are dampening business investment and exports in the resource sector. This has led to a modest downward revision to the Bank’s growth forecast for 2016 and 2017.
The Bank projects real GDP will grow by just over 1 per cent in 2015 before firming to about 2 per cent in 2016 and 2 1/2 per cent in 2017. The complex economic adjustments to the decline in Canada’s terms of trade will continue to play out over the projection horizon. The weaker profile for business investment suggests that, in the near term, growth in potential output is more likely to be in the lower part of the Bank’s range of estimates. Given this judgment about potential output, the Canadian economy can be expected to return to full capacity, and inflation sustainably to target, around mid-2017.
The Bank judges that the risks around the inflation profile are roughly balanced. Meanwhile, as financial vulnerabilities in the household sector continue to edge higher, risks to financial stability are evolving as expected. Taking all of these developments into consideration, the Bank judges that the current stance of monetary policy remains appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent.”
