Canada’s inflation likely to reach target rate in late 2017

The Bank of Canada maintained its key policy rate at 0.5% yesterday, on par with expectations. Also, the central bank upgraded their growth projections, mainly due to the Q1 2016 pop in growth. BoC now projects the Canadian economy to grow 1.7% this year, as compared to the earlier forecast of 1.4% growth. The growth rate is likely to expand further to 2.3% in 2017 and slow to 2% in 2018, according to the central bank.

Meanwhile, inflation will continue to be lower than the central bank’s 2% target rate; however, it is expected to return to the target rate by late 2017. On the contrary, core inflation is likely to remain close to or at the 2% target rate in the next coming years as weak fundamental inflationary pressures diminish exchange rate pass through to consumer prices.

The near-term growth of Canada might be ahead of the central bank’s forecast as manufacturing and export continue to gain from CAD’s past movements and solid domestic demand in the US, said TD Economics. But in the long-term, persistent structural headwinds are expected. Business investment is unlikely to rebound significantly until 2018.

“A weaker outlook for housing, leaves us expecting 2.0% growth for 2017, somewhat below the Bank of Canada's 2.3% forecast.  As a result, we remain comfortable in our view that it is will be some time before we see any movement in the policy interest rate”, added TD Economics.

Also, the central bank now foresees a change in growth drivers. It has downwardly revised business investment for 2016 and 2017 and has revised up government and housing spending. The central bank now anticipates trade to continue supporting growth in 2016, but it is likely to be a drag in 2017 due to movements in currency and a less favorable composition of global growth, according to TD Economics.

The central bank’s decision to hold rates and upgrade the economic outlook characterizes its view as cautious, mainly for the near-term outlook, according to TD Economics. This possibly shows the uncertainty regarding the ultimate result of the nation’s current economic adjustment, added TD Economics. Meanwhile, the economic growth continues to face external risks amidst major economic slack that require the present stance of accommodative monetary policy.