The Canadian dollar was up over half a percent after the Bank of Canada’s announcement it would maintain its overnight rate at 0.5%. The bank is expecting GDP to contract 1% in the second quarter, pulled down by "volatile trade flows, uneven consumer spending, and the Alberta wildfires."
"The key takeaway here is that it will take another very significant disappointment in the economy to get them to shift to an outright easing bias, let alone to cut further,” said Diyglas Porter, chief economist for the Bank of Montreal, in a note to investors. “Given that the market was priced for almost 40% odds of another cut in 2016 ahead of the announcement, that lack of overt dovishness explains the rally in the Canadian dollar.”
The central bank is expecting a 3.5% growth in the third quarter citing resuming oil production, the rebuilding of Fort McMurray and increased spending from the Canada Child Benefit.
The Bank of Canada downgraded its near-term outlook as it forecast GDP to grow by 1.3% overall in 2016 -- almost half a percent below its prior reported outlook.
According to economists at Scotiabank, the reduction in the 2016 forecast is mostly a result of poor performance in the second quarter.
The Bank of Canada is relying on fiscal stimulus from federal infrastructure spending and the Canada Child benefit to boost growth in the third quarter, according to economists at Scotiabank.
“While the fundamental elements of the bank’s projection are similar to those presented in April, the forecast has been revised down in light of a weaker outlook for business investment and a lower profile for export,” said a Bank of Canada press release.
The bank revised its forecast because of dampered enthusiasm for Canadian goods internationally and a lower profile for exports. However, the bank believes the underlying trend of export growth will continue, despite volatility.
Although business investment also weakened in the second quarter, the bank expects trending export growth will increase investment. The export forecast is one Scotiabank economists are skeptical of. In a note to investors, Scotiabank economists said the central bank had been “entirely wrong” about exports so far this year and their bet on exports was a “key risk in their assessment.”
