There were no surprises today as the Bank of Canada made its interest rate decision – choosing to sustain its rate at 0.5 per cent.
The Bank Rate is correspondingly 0.75 per cent and the deposit rate is 0.25 per cent.
In an official statement announcing the news, the Bank of Canada wrote that: “growth in the global economy is expected to strengthen gradually from about three per cent in 2016 to three and a half per cent in 2017-18, a weaker outlook than the Bank had projected in its January Monetary Policy Report (MPR). After a slow start to 2016, the US economy is expected to regain momentum, but with a lower profile and a composition that is less favourable for Canadian exports. Financial conditions have improved, partly in response to expectations of more accommodative monetary policy in some major economies.”
In justifying its decision, the Bank wrote that while prices of commodities and oil have risen from their lows earlier in the year, they are still well below historical averages. It described the economy’s adjustment to oil price shock as “ongoing”, stating that it will dampen growth during the projected horizon. Meanwhile, even though GDP growth has been “unexpectedly strong” that strength may be partly due to temporary factors “and may reverse in the second quarter”.
The Bank offered a positive spin on the future of the economy highlighting that “it does appear that the positive forces at work in the economy are starting to outweigh those that are negative”. It highlighted that non-resource exports are expected to strengthen, albeit their profile is weaker than previously projected due to slow demand overseas and the high Canadian dollar. It also highlighted that while business investment is shrinking due to declines in the energy sector it should turn positive later in the year.
Overall, the Bank has a lower estimated range for potential output growth.
Earlier in the day, the market had been anticipating a rate freeze with the Canadian dollar trading close to its strongest levels for nine months. The currency, which has been outperforming all other currencies in the developed world during the last three months, has been boosted recently by oil prices creeping above $40 a barrel once more, as well as the release of plans by the federal government to push an additional $120 billion of deficit spending into boosting the country.
Earlier today, the Canadian dollar stood at 78.10 US cents. However, this still places it around 25 per cent below 2012 levels after three years of depreciation.
Economists too had been predicting the rate would be frozen. In a Bloomberg
survey, all 30 economists polled predicted that rates would be held. Overall, forecasters are suggesting that the economy will grow at a rate of 1.6 per cent for the year.
The Bank of Canada cut rates twice last year in an effort to boost the then flagging economy.