As was widely expected, the Bank of Canada kept the overnight rate on hold at 75 basis points today. To justify its 'stay the course' position, the Bank cited that the downward pressure on inflation from sluggish economic growth in the first half of 2015 is likely to be offset by the upward pressure on prices stemming from the temporary effects of sector-specific factors and pass-through from the lower loonie.
The c.bank raised its inflation forecast reflecting slightly stronger readings seen already this year. However, the Bank expects core inflation to remain near to 2% over the forecast horizon as the upward pressure from past Canadian dollar depreciation offsets downward pressure from excess supply in the economy.
TD Economics says - "Pulling all of this together, it is our view that the economic forecasts in today's MPR, combined with the balanced language encompassing the interest rate announcement, point to a central bank that is comfortable with its current monetary policy stance. Given our expectation that the economic impact of lower oil prices is mostly behind us, we expect that the Bank of Canada will keep interest rates on hold until the end of 2016."
