Bank of Canada holds the line on key interest rate
Canadian economy on track as previous rate cuts have had the desired ‘stimulative effect,’ it says
“The odds of future rate cuts have been marked down modestly.” DOUG PORTER CHIEF ECONOMIST, BMO CAPITAL MARKETS
As expected, the Bank of Canada held its key interest rate at 0.5 per cent on Wednesday, amid a spate of improving domestic economic news.
Despite ongoing concerns about the effect of low oil prices and slowing growth in China, the central bank said the Canadian economy is on track as previous rate cuts have had the desired “stimulative effect.”
“The odds of future rate cuts have been marked down modestly,” Doug Porter, chief economist with BMO Capital Markets, wrote in a note to clients.
The central bank has twice cut its trendsetting rate this year, most recently in July, bringing it down from 1 per cent to 0.5 per cent as low oil prices slammed Canada’s energy sector.
The overnight rate — the rate at which commercial banks lend to each other — sets the pace for shortterm loans, including consumer loans and variablerate mortgages.
The Canadian dollar rallied on the announcement, which economists had expected would be a bit less optimistic, given recent turmoil in global markets.
Instead, the central bank struck a “neutral tone,” Porter wrote, noting the Bank of Canada said exports and household spending have kept its growth outlook intact.
In its July forecast, the Bank of Canada projected the economy would grow 1.5 per cent in the third quarter. It is scheduled to revise its call in October.
“The less pessimistic tone of the Bank of Canada’s policy announcement is a sign that interest rates have gone on hold unless there is a large additional decline in the price of oil,” Bill Adams, senior international economist at PNC Financial Services Group, wrote in a note to clients. “If the Bank of Canada is correct in assuming that the worst of the energy industry correction is in the rear mirror, their next move could be an interest rate hike around mid-year 2016.”
The rate-setting was the first since Statistics Canada data showed Canada’s economy slid into recession — as defined by two quarters of negative growth — in the first half of the year.
Canada’s economic performance since then has gained ground, with improvements in exports, auto production and sales, and job growth.
But a surprise slowdown in China’s economy in recent weeks further depressed oil and other commodity prices, sending shock waves through global stock markets.
Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy, the bank said.
“These adjustments are complex and are expected to take considerable time,” the statement said.
However, the central bank noted that economic activity continues to be “underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports,” the bank said.
Increasing uncertainty about growth prospects for China and other emergingmarket economies is raising questions about the pace of the global recovery, the bank acknowledged in a statement.
This has contributed to heightened financial market volatility and lower commodity prices, the bank said.
However, it noted that a falling Canadian dollar is “helping to absorb some of the impact of lower commodity prices.”
While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum, the bank said.
Total inflation remains near the bottom of the bank’s target range, the result of price declines in consumer energy products, while core inflation has been close to its target of 2 per cent, the bank also said.
Some economists were not ruling out a future rate cut.
“We still anticipate that further weakness in energy-related business investment, combined with an underwhelming performance from non-energy exports and possibly even some signs of weakness in housing, will eventually prompt the bank to cut rates by an additional 25 basis points to only 0.25 per cent,” Paul Ashworth, chief North American economist for Capital Economics, wrote in a note to clients.
The announcement came as Statistics Canada reported better than expected housing starts for the month of August. Starts unexpectedly surged 12.2 per cent in August to 217,000 units, led by strong condominium construction in Toronto.
The data was seen as further proof Canada is climbing out of what had been a mild recession in the first half of the year, economists said.