BoC maintains rate at 0.5%

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%.

In its announcement today, the Bank says global economic conditions are broadly what it anticipated in October’s Monetary Policy Report.

Read: Snapshot: Canadian economic data

“China continues its transition to a more sustainable growth path and the expansion in the United States is on track, despite temporary weakness in the fourth quarter of 2015,” says the BoC. “The U.S. Federal Reserve has begun to gradually withdraw its exceptional monetary stimulus.” It also expects global growth to “trend upwards” starting this year.

“Governor Poloz is willing to wait to see what the Finance Minister provides as a bolster to the economy before pulling the trigger on any more monetary easing,” writes Nick Exarhos of CIBC Economics in a note to analysts.

While the bank says that “financial vulnerabilities continue to edge higher,” it says that’s expected. Exharhos says that overall, the tone of the BoC’s rate decision comments is “fairly optimistic.”

Inflation in Canada is evolving broadly as expected, the BoC says. Total CPI inflation remains near the bottom of its target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods. As all of these factors dissipate, the BoC expects inflation will rise to about 2% by early 2017. Measures of core inflation should remain close to 2%.

Read: Carney says no need to raise rates

Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy. GDP growth likely stalled in the fourth quarter of 2015, pulled down by temporary softness in the U.S. economy, weaker business investment and several other temporary factors. The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions. National employment remains resilient despite job losses in the resource sector and household spending continues to expand.

Read: IMF downgrades outlook for world economy again

The Bank projects Canada’s economy will grow by about 1.5% in 2016 and 2.5% in 2017. The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain. The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.

The next rate announcement will be March 9, and the next full economic outlook update is April 13.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.