Bank of Canada Leaves Policy Rate at 1.0% and Releases Quarterly Monetary Policy Report

October 25, 2017

Canada’s overnight central bank interest rate was retained at 1.0% and will continue to be flanked by a 1.25% Bank Rate and a 0.75% deposit rate. After holding steady at 0.50% for two years, the overnight interest rate had been hiked by 25 basis points after each of the Governing Council’s prior two policy meetings in July and September. Analysts had not anticipated a third increase today. At 1.0%, the target now matches the post-Great Recession peak that prevailed from September 2010 until January 2015.

Officials released a statement following today’s meeting that revises projected GDP growth this year upward to 3.1%, proclaims that the economy is now approaching its potential non-inflationary level, and observes that wage inflation is still subdued because of residual slack in the labor market. Such is likely to trend up only gradually. Price inflation is expected to move up and eventually level off around the 2.0% target. The statement’s forward guidance strikes a note of caution:  “While less monetary policy stimulus will likely be required over time, the Governing Council will be cautious in making future adjustments to the policy rate.”

This seventh policy review of 2017 coincided with the publication of a quarterly Monetary Policy Report. Three development since the previous MPR are highlighted: 1) the central bank rate target was hiked twice and has doubled to 1.0% from 0.50% at midyear; 2) commodity prices are firming; and 3) the Canadian dollar has strengthened, which helps offset the inflationary effect of a faster narrowing of the output gap during the first half of this year. Updated macroeconomic forecasts for Canada now show GDP expanding 3.1% this year, then 2.1% in 2018 and 1.5% in 2019. Supply-side potential GDP is assumed to rise 1.3% this year, 1.4% in 2018 and 1.5% in 2019, and CPI inflation goes up 1.5% this year (versus a 2.0% target), then 1.7% in 2018 and 2.1% in 2019. The output gap, a gauge of the difference between actual GDP and its potential level, is estimated to have lied between +0.5% and -0.5% at the end of last quarter.

The macroeconomic projection do not embody a change in U.S. trade policies, but the text cites a shift toward protectionism as a risk factor that would dampen growth and lift inflation in both neighboring economies. Only moderate growth in the United States is projected — 2.2% this year and next followed by 2.0% in 2019, all of which is well below the 4% trend that President Trump seeks. Global GDP is seen expanding 3.4-3.5% per year. Monetary officials also express concern about  “the macroeconomic
and financial vulnerabilities associated with high household
indebtedness” in Canada.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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