The overnight rate will remain at 0.5%, the Bank of Canada announced this morning (September 9).
The decision to keep the rate at its current level was expected by analysts, as recent jobs and export data has suggested Canada’s economy may be back on track after contracting in the first two quarters of this year.
“The Bank’s decision to leave rates unchanged was not surprising,” Brian DePratto, economist at TD Economics, said in a note to investors. “In its last published forecast in July, the central bank had predicted a second consecutive drop in real GDP in Q2, followed by a resumption of moderate growth beginning in Q3.
“In recent weeks, the economy’s performance has been unfolding in line with these expectations.
Household spending is still strong, Canada’s central bank said, and a strengthening American economy is boosting exports.
“Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy,” the Bank said.
“While the overall export picture is still uncertain, the latest data confirms that exchange rate-sensitive exports are regaining momentum.”
Inflation has remained in line with the Bank’s expectations; however, total CPI inflation is still near the bottom of the target range, reflecting low energy prices. Core inflation has been around 2%.
The Bank said low prices for oil and other commodities continue to impact the country’s resource sector, “with some spillover to the rest of the economy.”
Uncertainty in China has led to increased volatility in financial markets, making global recovery less predictable.
This latest release comes two months after the Bank’s last announcement when it cut the overnight rate by 25 basis points to 0.5% from 0.75%. At that time, it also downgraded its GDP growth outlook for the rest of the year to 1.1% from 1.9%. In this morning’s announcement, the Bank said “the dynamics of GDP growth as outlined in July’s MPR [Monetary Policy Report] also remain intact,” but it will not release a full economic update until its next announcement.
DePratto forecasts growth of around 2.5%, annualized, in the last half of 2015, but cautions that downside risks still exist.
“In particular, commodity prices remain weak, with a high degree of uncertainty around the Chinese growth outlook,” he said.
“While our expectation is for rates to remain on hold, we cannot rule out the possibility of another rate cut should the external environment deteriorate meaningfully.”
The Canadian dollar increased a modest tenth of a cent on the news, settling at 75.58 cents U.S. as of press time.
