0

Bank of Canada keeps key rate steady

Bank says inflation and economic activity are unfolding largely as it predicted in July


 

BoC Policy Report 20150121

OTTAWA – The Bank of Canada lowered its economic growth forecasts for 2016 and 2017 on Wednesday as it stood firm on its trend-setting interest rate.

The central bank maintained its July estimate for 2015 economic growth but downgraded projections for the next two years, blaming the hits to business investment and resource exports from persistently low commodity prices.

The bank predicted it will take several years for Canada to fully adjust to the environment of cheaper commodities.

“The Canadian economy is undergoing a complex set of adjustments,” the Bank of Canada wrote in its latest monetary policy report, also released Wednesday

“A prolonged period of deteriorating competitiveness, punctuated by the Great Recession, led to the destruction of many firms and depressed business investment outside the energy sector, resulting in significantly reduced capacity in the non-resource sector.

“It is in this context that the Canadian economy has to adjust to lower commodity prices.”

The bank maintained its July forecast that the economy — as measured by real gross domestic product — will grow by 1.1 per cent in 2015.

The report presented a revised growth projection for 2016 of two per cent, down from 2.3 per cent, and a 2017 forecast of 2.5 per cent, down from 2.6.

In explaining its decision to keep its overnight rate at 0.5 per cent, the bank noted that inflation and economic activity was largely unfolding as predicted, even as low oil prices continue to weigh on the economy.

It said the country’s economy is bouncing back from the technical recession that kicked off 2015.

The rebound, the bank added, is supported by the long-awaited “signs of strength” in non-resource sectors, thanks to solid growth in the United States.

“Economic momentum is rebuilding,” the report said.

But it cautioned that expansion in non-resources industries would still fall short of offsetting the impact of the oil slump.

The economy hit reverse over the first two quarters of 2015 after per-barrel prices on crude dropped by more than half.

The central bank once again pointed to robust household spending as the key driver of Canada’s economic activity. As a result, it warned the overall ratio of debt to disposable income crept higher.

It said the economy is also receiving boosts from the lower Canadian dollar and the bank’s moves earlier this year to lower its benchmark rate.

The weak start to 2015 pushed the economy into its first technical recession in six years, following declines of 0.8 per cent in the first quarter and 0.5 per cent in the second.

The bank expects real GDP to average about two per cent over the last two quarters of 2015, despite the struggles of the ever-important resource sector.

The late-2015 growth, the bank added, will materialize as the economy shakes off the bulk of the negative effects from the oil-price shock.

The economy will also be bolstered by increased consumption by families who spent the child-benefit cheques they received in the summer from the outgoing Conservative government, the bank said.

The projections in the Bank of Canada quarterly report are based on previously announced plans by the federal government — not on campaign promises made by the incoming Liberal government.

The bank’s next rate announcement is scheduled for Dec. 2.

Follow @AndyBlatchford on Twitter.


 
Filed under:

Sign in to comment.