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Bank of Canada keeps key rate on hold at 0.5 per cent

Resource sector continues to adjust to lower prices for oil and other commodities


 

BoC Policy Report 20150121

OTTAWA — The Bank of Canada kept its key interest rate on hold at 0.5 per cent on Wednesday and said the country’s resource sector continues to adjust to lower prices for oil and other commodities.

“These adjustments are complex and are expected to take considerable time,” the central bank said in its interest rate announcement.

“Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States with particular strength in the sectors of the U.S. economy that are important for Canadian exports.”

However, it noted that increased uncertainty about growth in China and other emerging markets is raising questions about the pace of global recovery. It says the uncertainty is contributing to volatility on the financial markets.

“Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy,” the central bank statement said.

It said the latest data confirm exports that are sensitive the changes in exchange rates are regaining momentum but the overall export picture is still uncertain.

The Bank of Canada to cut its overnight rate target to 0.5 per cent in July, down from 0.75 in January. The rate is influential with commercial lenders such as the country’s big banks, which lowered their prime rates and some mortgage rates in July.

Since then, Statistics Canada reported the economy contracted in the second quarter in line with the Bank of Canada’s expectations.

That was followed by better-than-expected trade results for July and a stronger-than-expected jobs report for August that suggested the economy is pulling out of the slump that saw it contract in the first two quarters, putting the country into a recession.

Inflation has also ticked higher in recent months as rising food prices have offset lower gasoline prices, while core inflation — which excludes some volatile items _ has been above two per cent for a year.

In its statement Wednesday, the Bank of Canada said inflation has “evolved in line” with its July monetary policy report.

Total inflation has remained near the bottom end of the Bank of Canada’s target range of between one and three per cent, due to the drop in energy prices. However, core inflation has been close to two per cent due to the drop in the Canadian dollar and some sector-specific factors, the bank said.

The Bank of Canada’s next rate announcement is set for Oct. 21 when it is also scheduled to release its updated outlook for the economy and inflation in its monetary policy report.

For the record: The Bank of Canada’s statement

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Inflation has evolved in line with the outlook in the Bank’s July Monetary Policy Report (MPR). Total CPI inflation remains near the bottom of the target range, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors. The dynamics of GDP growth in Canada outlined in July’s MPR also remain intact. The stimulative effects of previous monetary policy actions are working their way through the Canadian economy.

Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy. These adjustments are complex and are expected to take considerable time. Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports.

Increasing uncertainty about growth prospects for China and other emerging-market economies, in contrast, is raising questions about the pace of the global recovery. This has contributed to heightened financial market volatility and lower commodity prices. Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy. While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum.

Meanwhile, risks to financial stability are evolving as expected. Taking all of these developments into consideration, the Bank judges that the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent.

The next scheduled date for announcing the overnight rate target is 21 October 2015.


 

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