Bank of Canada maintains policy rate at 0.5 pct; revises down growth projections

The Bank of Canada, on Wednesday, maintained its key policy rate at 0.5 percent. Meanwhile, the central bank has lowered the economic growth projection, reflecting the effects of Alberta wildfires, Brexit and weakness in underlying economic activity. The central bank projects the economy to grow 1.3 percent this year, lowering it by 0.4 percentage points from April’s Monetary Policy Report. The Canadian economy is now forecast to expand 2.2 percent next year, as compared with the earlier projection of 2.3 percent, and is expected to grow 2.1 percent in 2018.

The second quarter growth is likely to be reduced by 1.1 percentage points owing to the Alberta wildfires, whereas the rebound is likely to stimulate the third quarter growth by 1.3 percentage points, according to the Bank of Canada. Therefore, the central bank projects economic growth in second quarter to be -1 percent and in third quarter to be 3.5 percent. The output gap is not likely to close slightly later, by the end of 2017, noted TD Economics in a research report.

Brexit impact on the Canadian economy is slightly smaller and is likely to reduce the level of the nation’s GDP by 0.1 percent in the projection horizon. Meanwhile, headline inflation is likely to be slightly lower than the Bank of Canada’s target of 2 percent in 2016. Commodity prices might accelerate inflation higher in early 2017. Inflation is likely to hover around the target after that.

According to the Canadian central bank, higher oil prices and better than expected economic grow in the US are upside risks to Canada’s economic outlook. Meanwhile, softer household spending, sluggish business investment and subdued growth in emerging nations might pose as headwinds to the Canadian economic growth.

Meanwhile, TD Economics in a research report, noted that the Bank of Canada might be a bit optimistic in its near-term outlook.

“We expect growth this year of 1.2 percent, slightly below the Bank's expectations, and are also less optimistic regarding 2017 (TD: 1.9 percent; Bank of Canada: 2.2 percent). Given our outlook, we expect that it may take longer for the output gap to close, and thus see no impetus for a rate move before 2018,” added TD Economics.