Canada’s central bank is keeping its overnight rate target at 1% – the same rate it has been for more than four years and for the 33rd consecutive announcement.
The Bank of Canada (BOC) expects the global economy to remain on the right track in 2015 and 2016, but with a weaker outlook than the bank had anticipated in July.
“Persistent headwinds continue to buffet most economies and growth remains reliant on exceptional policy stimulus,” the BOC said in a release October 22.
“Against a background of ongoing geopolitical uncertainties and lower confidence, energy prices have declined and there has been a significant correction in global financial markets, resulting in lower government bond yields.”
The bank sees the American economy strengthening, especially in areas that will benefit Canada in terms of export opportunities. This is due in part to the strengthening U.S. dollar relative to the Canadian dollar, and the bank said exports are already picking up.
Real GDP growth in Canada is expected to average around 2 ½% over the next year and slow to 2% in 2016.
Business investment in Canada remains weak, but the housing market and consumer spending are picking up, with auto sales hitting all-time highs. This is due to low borrowing rates. Household imbalances are slightly increasing risks to financial stability.
Inflation remains close to the 2% rate target, consistent with the bank’s previous forecasts in July and September. Core inflation, however, rose more quickly than expected in July, but this was offset by lower energy prices. Continued economic slack and retail competition are keeping inflation “muted.”
“As global headwinds recede, confidence in the sustainability of domestic and global demand should improve and business investment should pick up,” the bank said in its statement. “Together with a moderation in the growth of household spending, this is expected to gradually return Canada’s economy to a more balanced growth path.
“As the economy reaches its full capacity in the second half of 2016, both core and total CPI inflation are projected to be about 2% on a sustained basis.”
Douglas Porter, chief economist and managing director of economic research for BMO Financial Group, called today’s announcement “the very essence of neutral.”
“…the bank’s main point is that it feels zero urgency to do anything with rates, either up or down,” he said. “Perhaps the only surprise is that they didn’t dwell on the downbeat aspects of the outlook.
“But with the Canadian dollar already close to five-year lows earlier today, the bank likely feels no need to give the currency another subtle nudge.”
