The Bank of Canada is maintaining its target for the overnight rate at 0.5%. The bank rate is correspondingly 0.75% and the deposit rate is 0.25%.
The BoC says inflation has evolved in line with its outlook in its July Monetary Policy Report. Total CPI inflation remains near the bottom of the Bank’s target range, owing to declines in consumer energy prices.
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Meanwhile, core inflation is close to 2%. The central bank says that’s because the short-term effects of the depreciation of the Canadian dollar are roughly offsetting disinflationary pressures from economic slack, which has increased throughout the year. The central bank judges that the underlying trend in inflation continues to be about 1.5% to 1.7%.
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Alongside its interest rate announcement, the BoC has released its final Monetary Policy Report of the year. The report discusses Canada’s more modest economic outlook, as well as the five main factors currently affecting the central bank’s inflation predictions. Those are:
1. weaker Canadian exports and investment;
2. imbalances in the Canadian household sector;
3. higher non-energy commodity prices;
4. stronger U.S. private demand; and
5. financial market stress in emerging-market economies.
Based on current economic data, the BoC now projects real GDP will grow by just over 1% in 2015, before firming to about 2% in 2016 and to 2.5% in 2017.
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In a release, CIBC World Markets economist Nick Exarhos says, “[The BoC’s] slight downwards revisions to the expected growth profile in 2016 set a more modest bar for the economy to pass, meaning that further easing from the Bank is unlikely. The [central bank’s] statement highlights still-weak commodity prices and weaker-than-expected global growth […] All told, nothing that the market wouldn’t have been expecting. And as such, we shouldn’t see much market reaction.”
BoC’s economic outlook
Global economic growth has been a little weaker than expected this year, but the dynamics pointing to a pickup in 2016 and 2017 remain largely intact. In particular, uncertainty about China’s transition to a slower growth path has contributed to further downward pressure on prices for oil and other commodities—these factors are weighing on growth in many emerging markets and some other economies.
Looking ahead to 2016 and 2017, the positive effects of cheaper energy and broadly accommodative financial conditions should become increasingly evident, says the BoC. It predicts the U.S. economy will keep growing at a solid pace, with particular strength in private domestic demand, which is important for Canadian exports.
On the domestic front, Canada’s economy has rebounded, as projected in July. In non-resource sectors, the looked-for signs of strength are more evident, and are supported by the stimulative effects of previous monetary policy actions and past depreciation of the Canadian dollar.
Plus, household spending continues to underpin economic activity and is expected to grow at a moderate pace over the projection period.
However, lower prices for oil and other commodities have further lowered Canada’s terms of trade. Those prices are also dampening business investment and exports in the resource sector, and are a driving factor behind the BoC’s lower GDP projections for 2015 and going into 2017.
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The weaker profile for business investment suggests that, in the near term, growth in potential output is more likely to be in the lower part of the Bank’s range of estimates. Given this judgment about potential output, the Canadian economy can be expected to return to full capacity, and inflation sustainably to target, around mid-2017.
And, the BoC judges that the risks around the inflation profile are roughly balanced. Meanwhile, as financial vulnerabilities in the household sector continue to edge higher, risks to financial stability are evolving as expected.
Taking all of these developments into consideration, the central bank judges that the current stance of monetary policy remains appropriate.