Bank of Canada interest rate announcement revealed

May decision sees declaration about interest rate as well as outlook on economic growth

The Bank of Canada made its interest rate announcement at 10am EST today – one of eight announcements scheduled for the year – and there were no surprises.

As had been widely predicted, the central bank chose to maintain its key interest rate at 0.5 per cent. The Bank rate is correspondingly 0.75 per cent and the deposit rate is 0.25 per cent.

Commenting earlier to the Wall Street Journal, CIBC capital markets chief economist Avery Shenfeld remarked that “there’s obviously no reason to think about raising rates any time soon” adding that “a rate cut doesn’t look needed given that the currency has backed off its earlier strong point”.

What was of more interest to most, were the projections the bank would issue about its expectations for economic growth, especially with the massive forest fire in Alberta leading to oilsand production shutdowns and most analysts therefore expecting that to prompt reduced expectations for the second quarter – and so it occurred.

While there was no Press conference to accompany the announcement, the Bank did release the following comments in a statement:

“The global economy is evolving largely as the Bank projected in its April Monetary Policy Report (MPR). In the United States, despite weakness in the first quarter, a number of indicators, including employment, point to a return to solid growth in 2016. Financial conditions remain accommodative, with ongoing geopolitical factors contributing to fragile market sentiment. Oil prices are higher, in part because of short-term supply disruptions.

In Canada, the economy’s structural adjustment to the oil price shock continues, but is proving to be uneven. Growth in the first quarter of 2016 appears to be in line with the Bank’s April projection, although business investment and intentions remain disappointing. The second quarter will be much weaker than predicted because of the devastating Alberta wildfires. The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1.25 percentage points off real GDP growth in the second quarter. The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April.

Inflation is roughly in line with the Bank’s expectations. Total CPI inflation has risen recently, largely due to movements in gasoline prices, but remains slightly below the two per cent target. Measures of core inflation remain close to two per cent, reflecting the offsetting influences of past exchange rate depreciation and excess capacity.

Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher. Meanwhile, the risks to the Bank’s inflation projection remain roughly balanced. Therefore, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate, and the target for the overnight rate remains at 0.5 per cent.”

With problems compounded by recent economic data, the somewhat cautious tone of this release, compared to the Bank’s comments in April, were perhaps of no surprise. Now many economists are predicting that the rate may be kept on hold until 2017, or even until 2018, when rates would likely rise again.