Canada’s central bank has once again announced it is maintaining its overnight rate target at 0.5%, the historic low where it has remained since mid-2015.
Bank of Canada Governor Stephen Poloz said inflation remains in line with the Bank’s projections in April’s Monetary Policy Report. The global economy “continues to gain traction,” he said, highlighting an anticipated U.S. economic rebound. The impact of lower oil prices has been absorbed, and strong labour data suggests an overall economic strengthening.
Poloz pointed out that some risks remain, including restrained price and wage growth. As well, export growth remains muted.
Douglas Porter, chief economist at BMO Financial Group, said today’s announcement was less “decidedly neutral” than the previous one.
“The tone was a tad less dovish and a bit more upbeat than generally expected, highlighting that the recent softness in inflation – and U.S. growth – was temporary, and that recent Canadian economic data have been ‘encouraging,’” he said in a note to investors.
“Importantly, the Bank dropped the word ‘material’ when discussing ‘ongoing excess capacity.’”
Competition in the retail sector has been pushing food prices lower, leading to a temporary dampening of inflation, Poloz said. The economy still shows ongoing excess capacity, as core inflation remains below the 2% target.
Porter pointed out that the wording of the announcement described the current overnight rate as “appropriate at present,” compared with just “appropriate” in the previous announcement. He said this could mean Poloz is saying this could change.
“Overall, the focus here is much more on the positives and less so on the specific risks,” Porter said. “The main message is that the Bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them.”
He said this move probably wouldn’t happen until 2018’s second quarter.
The Canadian dollar reacted positively to the announcement, increasing almost half a cent. As of press time, the loonie was trading at around 74.31 cents U.S., up from an overnight low of 73.85 cents U.S.
@EmmaHampelBIV
