Canada maintains rate as growth in line with forecast

December 7, 2016

By CentralBankNews.info
    Canada’s central bank left its benchmark Bank Rate at 0.50 percent, as widely expected, and said economic activity was largely as it had forecast with more moderate growth seen in the current quarter following a strong rebound in the third quarter from a very weak first half of the year.
    The Bank of Canada (BOC), which has maintained its rate since its last easing in July 2015, said consumption was robust and supported by new child benefits while the impact of federal infrastructure spending had yet to show up in economic data.
    Business investment and non-energy exports continue to disappoint and while there have been gains in employment there is still a significant amount of economic slack, in contrast the United States, the BOC said, almost foreshadowing next week’s U.S. Federal Reserve decision.
    In October the BOC lowered its forecast for Canada’s Gross Domestic Product to grow by 1.1 percent this year, down from 1.3 percent forecast in July, and to 2.0 percent in 2017, down from 2.2 percent. In 2018 the country’s economy is still seen expanding by 2.1 percent.
    Canada’s GDP grew by an annual rate of 1.3 percent in the third quarter, up from 1.1 percent in the second quarter when oil output was affected by wildfires in Alberta.
    Canada’s inflation rate has risen in recent months but is still “slightly below expectations, largely due to lower food prices,” the central bank said.
    Headline inflation in October rose to 1.5 percent in from 1.3 percent in September while core inflation eased to 1.7 percent from 1.8 percent in the previous two months.
    The BOC said the higher core inflation rate shows that economic slack is being offset by past exchange rate depreciation though this effect is dissipating.
    Canada’s dollar has been trending downward against the U.S. dollar since 2013 but reversed course in mid-January this year when it rose sharply. But since early May it has been easing but was trading at 1.33 to the USD this morning, still up 4.1 percent since the start of the year. 


    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.
Economic data suggest that global economic conditions have strengthened, as the Bank anticipated in its October Monetary Policy Report (MPR). However, uncertainty, which has been undermining business confidence and dampening investment in Canada’s major trading partners, remains undiminished. Following the election in the United States, there has been a rapid back-up in global bond yields, partly reflecting market anticipation of fiscal expansion in a US economy that is near full capacity. Canadian yields have risen significantly in this context.
In Canada, the dynamics of growth are largely as the Bank anticipated. Following a very weak first half of 2016, growth in the third quarter rebounded strongly, but more moderate growth is anticipated in the fourth quarter. Consumption growth was robust in the third quarter, supported by the new Canada Child Benefit, while the effects of federal infrastructure spending are not yet evident in the GDP data. Meanwhile, business investment and non-energy goods exports continue to disappoint. There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States. While household imbalances continue to rise, these will be mitigated over time by announced changes to housing finance rules.
Total CPI inflation has picked up in recent months but is slightly below expectations, largely because of lower food prices. Core inflation is close to 2 per cent because the effect of persistent economic slack is still being offset by that of past exchange rate depreciation, although the latter effect is dissipating.
Overall, the Bank’s Governing Council judges that the current stance of monetary policy remains appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent.”
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