Bank of Canada holds the overnight rate at 0.5%

(November 04, 2015 )

·           Bank of Canada held the overnight rate at 0.5%, which was in line with expectations.
·           The economy rebounded mid-year as expected, and inflation is following the Bank’s expectations.
·           The Bank judged risks to the outlook for inflation as roughly balanced and “current stance of monetary policy remains appropriate.”
The Bank of Canada met market expectations and maintained the overnight rate at 0.5%. With the economic and inflation outlook evolving in line with the Bank’s expectations, “the current stance of monetary policy remains appropriate.”
Today’s statement and Monetary Policy Report showed limited changes in the Bank’s assessment of the economic outlook relative to July, with the anticipated rebound in activity materializing and the underlying trend inflation rate holding in the range of 1.5% to 1.7%. Revised assumptions for the price of oil and other commodities during the forecast period resulted in the Bank downgrading its outlook slightly for growth in 2016 and 2017. The Bank still anticipates that the economy will grow at 2.0% in 2016 and 2.5% in 2017, faster than 2015’s 1.1% pace.
The Bank now expects the economy to return to full potential “around mid-2017,” which is a slight change from “in the first half of 2017” as indicated in July. The lower profile for commodity prices also resulted in the Bank lowering its forecast for the headline consumer price index (CPI) rate throughout 2016, although both the headline and core measures are still expected to return to 2.0% in 2017.
The most notable changes to the forecast for 2015 was the boost to the Bank’s expectation for the contribution from net exports to growth, although this is anticipated to be offset by a reduction in inventories thus leaving real gross domestic product (GDP) growth at 1.1%. The updated 2016 forecast showed the effects of a lower assumed price for oil during the forecast horizon, with business fixed investment now anticipated to act as a weight on growth again next year. The Bank’s custom is to assume oil prices remain around current levels, and accordingly, it is looking for prices to be $15 to $20 lower than embedded in its July forecast.
The updated inflation forecast profile showed that the Bank now expects the headline inflation rate to be lower in 2016 and average 1.5%, compared to 1.9% in the July update, due to the lower energy price assumptions. The profile for the core inflation rate was lifted by 0.2 percentage points for 2016. The Bank’s updated Canadian dollar assumption is US$0.76, which is lower than the US$0.80 in the July update.