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Bank of Canada Rates on Hold Again

Bank of Canada Hold Overnight Rate at 0.5%

 

The Bank of Canada’s decision to hold rates steady once again was very much as expected, even though first half growth was well below the forecast in the July Monetary Policy Report. US growth in the first half of this year was also disappointing, reflecting weakness in business and residential investment. US consumer spending was strong, held up by a buoyant labour market.

 

Rebounding US growth in the second half bodes well for a sustained rebound in Canadian exports. The recently released July trade report for Canada showed a major improvement in exports to the US, a long-awaited sign of a revival in Canadian growth.

 

Other recent indicators suggest that Canada’s economy entered the third quarter on a stronger footing following the wildfire-related slump in the second quarter. Q2 growth was also depressed by the larger-than-expected contraction in exports. The Bank expects a strong rebound in Q3 growth as oil production resumes and rebuilding in Alberta begins.

 

Fiscal stimulus will also play a role in the second half economic revival as consumer spending is boosted by the July 1 introduction of Canada Child Benefits payments. Federal infrastructure spending should also begin to impact growth by the final quarter of this year. Nevertheless, the Bank suggested that growth for the remainder of this year will remain below their July forecast.

 

Inflation is in line with BoC expectations. Total CPI inflation is below the 2% target largely owing to the decline in consumer energy prices. “Measures of core inflation remain around 2%, reflecting offsetting effects of excess capacity and past exchange rate depreciation”.

 

As always, the final paragraph of the Bank’s statement assesses economic risks. The report suggests that the inflation profile has trended downward since July. As for elevated household debt levels, long a concern, the Bank alluded to the recent slowdown in the Vancouver housing market suggesting that while still early days, it might well be the start of a soft landing. Recent data for Toronto, however, suggest that housing activity remained as robust as ever in August. Clearly, household imbalances continue to rise and heighten financial vulnerabilities.

 

Given the likely path of economic growth in Canada, I expect the Bank to maintain the current stance of monetary policy through 2017. This means that Canadian interest rates will remain well below rates in the US, as the Fed will likely hike the overnight rate once again either later this year or early next year. Mortgage rates will remain low for longer.

 

Thank you to Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres for this article.

2016-09-08T03:06:27+00:00