The Bank of Canada is keeping its overnight rate target at 0.75%, the central bank’s Governor Stephen Poloz announced this morning (April 15).
With no growth in 2015’s first quarter, Canada’s economy has effectively “stalled,” keeping in line with Poloz’s statement in March that the quarter would be “atrocious” due to the slump in crude prices. Overall, however, the hit to the economy is not expected to be larger than predicted in January, when the central bank surprised analysts by moving the rate from 1% for the first time in over four years. Instead, the effects will just be felt sooner than originally anticipated, with growth picking up through the end of the year.
“The Bank’s assessment is that the impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger,” the release said.
“The ultimate size of this impact will need to be monitored closely.”
TD Economics’ senior economist Randall Bartlett said the decision to keep the rate at 0.75% comes as no surprise.
“To justify its ‘stay the course’ position, the Bank cited that the downward pressure on inflation from sluggish economic growth in the first half of 2015 is likely to be offset by the upward pressure on prices stemming from the temporary effects of sector-specific factors and pass-through from the lower loonie,” Bartlett said.
The Bank expects the Canadian dollar to remain around 79 cents U.S. over the foreseeable future – down from the 86 cents forecast in January.
“Since January, the Canadian dollar has depreciated against the U.S. dollar, largely reflecting the broad strength of the U.S. dollar and the expected divergence in the paths for monetary policy in the two countries,” the Bank said in its April 15 Monetary Policy Report. “The current level of the Canadian dollar is also consistent with the dollar’s historical relationship with oil prices.”
The central bank anticipates Q2 will see real GDP growth bounce back and then strengthen to 2 ½ % on a quarterly basis until mid-2016. All told, real GDP is expected to grow 1.9% in 2015, 2.5% in 2016 and 2.0% in 2017.
Globally, the Bank of Canada sees potential for growth to average 3.5% annually through to 2017, which is consistent with its forecast in January. The United States also experienced a weak – although not as weak as in Canada – first quarter, but growth is expected to pick up in Q2.
“No big drama from the Bank today – unlike three months ago – but they still offered some tantalizing tidbits,” BMO’s Douglas Porter said. “The key point here is that while the economy staggered out of the gate in 2015, the Bank has not fundamentally shifted its view on the overall impact of the oil shock.”
As of press time, the Canadian dollar is almost a full cent higher than it was prior to the announcement, sitting at 80.60 cents U.S.
The next rate announcement is scheduled for May 27.
