Bank of Canada maintains overnight rate target 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 a release, the Bank says recent economic developments reinforce its view that growth will gradually strengthen and broaden. But, while the U.S. is expected to rebound following weak Q1 growth that was anticipated, Canada will see the opposite in the near term.

Read: Why weak Q1 growth in U.S. shouldn’t be a surprise

For Canada, the Bank expects very strong growth in the first quarter will be followed by some moderation in the second quarter.

The upside is the Canadian economy has nearly finished adjusting to lower oil prices, and recent economic data have been encouraging, including indicators of business investment. On top of that, consumer spending and the housing sector continue to be robust on the back of an improving labour market, across all regions.

Read: CPI at 1.6% for second month amid higher energy prices, lower food costs

The downside, says the Bank, is the domestic housing market has yet to cool, despite measures that have contributed to more sustainable debt profiles. Plus, export growth remains subdued; this was anticipated in the April MPR, in the face of ongoing competitiveness challenges.

Read: Canadian economy takes unfair hit from global perceptions

Inflation is broadly in line with the projections in the April monetary policy report (MPR). While food prices continue to decline–mainly because of intense retail competition, pushing inflation temporarily lower–the Bank’s three measures of core inflation remain below 2%, and wage growth is still subdued, consistent with ongoing excess capacity in the economy.

In an industry note, Avery Shenfeld, managing director at CIBC Capital Markets, says the Bank’s announcement offers nothing surprising for markets. “Look for the first hikes to come in early 2018, a delay designed to keep the [loonie] in check,” he says. Shenfeld adds the risk of doing this is “the central bank can’t always choose how we get back to full employment, and with growth looking to easily top 4% in the first quarter, the market is understating the path for Canadian rates over the next few years.”

Staff

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