Bank of Canada Retains 0.5% Overnight Money Rate Target and Releases New Forecasts

April 13, 2016

A statement justifying the existing central bank interest rate structure makes seven primary assertions.

First, the global economic outlook has weakened since January.

Second, commodity prices are slightly above levels assumed at the start of this year, although well below historical averages.

Third, the Canadian dollar has firmed.

Fourth, potential non-inflationary output growth had to be lowered because of shrinking business investment.

Fifth, fiscal stimulus embodied in the recently unveiled federal Canadian budget “will have a notable positive impact on GDP,” more than offsetting the net drag from other changed assumptions mentioned above.

Sixth, Canada’s negative output gap is likely to disappear sometime in the second half of 2017, a bit sooner than the end-2017 previously assumed date.

Seventh, inflation is tracking close to what officials anticipated before, but such is projected now to be some 0.1 percentage point above the old expected path.

Risks to the new forecast are considered roughly balanced.  Financial vulnerabilities are edging higher, but the existing policy stance is still presumed appropriate.  The central bank’s overnight rate target was hike three times by 25 basis points each in three successive meetings in June, July and September of 2010.  But last year saw two of those tightenings reversed with engineered 25-basis point reductions in January and July to the current 0.5% level.

In conjunction with today’s rate decision, the Bank of Canada also released its quarterly Monetary Policy Report.  This contains new forecasts for Canada and the global economy.  World growth projections were trimmed to 3.0% from 3.3% for 2016 and 3.4% from 3.6% in 2017.  Global GDP of 3.6% is assumed for 2018.  The downsized global growth assumption results from downward revisions of expected growth in the U.S., Euroland, Japan, oil-importing emerging markets and rest of the world.  Only Chinese growth was raised, and that was by just a tad.  Regarding Canada, real GDP is forecast to expand 1.7% this year, 2.3% in 2017 and 2.0% in 2018.  The 2016 forecast has been bumped higher, but the 2017 projection is slightly lower than before.  CPI inflation is seen easing further from current levels to 1.5% by the last quarter of 2016 but returning to 2.0% a year later and 2.1% in 4Q18.  Core inflation will hover very close to the 2.0% target throughout the policy horizon.

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



Comments are closed.