Bank of Canada Leaves Policy Unchanged

July 13, 2016

Canada’s overnight money rate target has been 0.50% since two 25-basis points cut last year implemented in January and July.  Monetary officials retained the 0.50% rate but lowered projected GDP growth this year to 1.3% and pushed back slightly the expected timing when the negative output gap, which depresses inflation, will disappear to the end of 2017.  Risks are generally balanced to a forecast that observes inflation to be currently below target but likely to hover around the 2.0% objective throughout 2017, but officials stress that uncertainty is even more heightened.  The statement announcing today’s decision projects an uneven acceleration of Canadian growth from 1.3% this year to 2.2% in 2017 and 2.1% in 2018.  Potential GDP this year will expand within a range of 1.2% to 1.8%.

Several matters are dealt with in the forecast.  These include Canada’s complex adjustment to the steep drop in oil prices, where ongoing progress can be observed, the substantial but temporary effects of the wildfires near Fort McMurray, and the eventual impact of the British vote to leave the EU, which at this early stage is of a highly uncertain nature.  Besides the aforementioned statement, the Bank of Canada released two other pertinent documents.  Opening remarks at the post-meeting press conference are actually more illuminating than the rate announcement in laying out the reasons why officials were not inclined to cut their interest rate at this time.  For considerable background information, a new quarterly Monetary Policy Report has been published.

The interest rate target was lowered to 0.25% in the Great Recession.  Subsequently, three 25-basis point hikes were done at successive meetings in June, July and September of 2010.  The rate stayed at 1.0% thereafter until a cut in January 2015.  Canada experienced a recession in the first half of 2015, with GDP contracting in both 1Q and 2Q. GDP also fell last quarter by about 1.0% according to Bank of Canada officials.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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