Bank of Canada remains cautious as exports fall
Despite signs of future growth, bank concerned over economy’s 1.6% slide in the second quarter
OTTAWA— The Bank of Canada struck a note of caution Wednesday as it held its key interest rate target steady at 0.5 per cent and raised concerns after the export sector disappointed earlier this year.
“While the strength in exports during July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated,” the central bank said.
The central bank said the risks for inflation have “tilted somewhat to the downside” though remained roughly in line with its expectations, with total inflation below the 2-per-cent target and measures of core inflation around 2 per cent.
TD Bank economist Brian DePratto said the Bank of Canada’s tone was more dovish than he expected.
“Interestingly, despite providing a laundry list of reasons to expect healthy growth in the second half of the year, the discussion of the Canadian growth outlook ended on the somewhat sour note that growth may disappoint their July forecast,” DePratto said.
The concern follows news last week that the economy contracted at an annual pace of 1.6 per cent in the second quarter, worse than the 1 per cent forecast by the Bank of Canada in its July policy report.
The decline came due to the Alberta wildfires in May and a drop in exports that was larger and more broad-based than expected, the central bank said. However, the economy grew in June and the latest trade figures from Statistics Canada showed export gains in July.
“While Canada’s economy shrank in the second quarter, the bank still projects a substantial rebound in the second half of the year,” the Bank of Canada said.
Since July 2015, the bank’s target for the overnight rate has been set at 0.5 per cent. Bank of Montreal chief economist Doug Porter said the bank has “zero appetite for rate hikes.”
“The Canadian economy is facing stiffer headwinds than expected, but it is going to take a lot to rock the Bank of Canada’s boat,” Porter wrote in a note to clients.
“Still, the frank admission that exports have been a clear disappointment and that inflation risks are tilted to the downside is a notable change in tone from the bank.”
The third quarter is expected to show growth, as production from the oilsands resumes after temporary shutdowns because of the wildfires and work begins on rebuilding damaged portions of Fort McMurray, Alta., and surrounding areas.
The federal government’s new Canada child benefit program is also forecast to increase consumer spending, while infrastructure spending by Ottawa is expected to lend a boost in the second half of the year.
In its July report, the Bank of Canada forecast economic growth to bounce back in the third quarter to an annual pace of 3.5 per cent before slowing to a 2.8-per-cent pace for the last three months of the year.
The central bank also addressed on Wednesday the real estate market, which has become an area of growing concern in the hot markets of Vancouver and Toronto.
“While there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise,” it said.
Bank of Canada governor Stephen Poloz has warned that soaring house prices in Vancouver and Toronto have been climbing at an unsustainable clip, as prices have outpaced local economic fundamentals.