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General Doug English 23 Apr


Bank of Canada

As was widely expected, The Bank of Canada today announcedthat it is maintaining its target for the overnight rate at 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. Core inflation, at 2 percent, is a reflection of the dampening effects of a slowing economy offset by the pass through effects of the lower dollar.

The Bank is hopeful that global growth will strengthen in coming months to 3-1/2 percent—consistent with their forecast in January’s Monetary Policy Report (MPR)—as a direct result of central bank rate cuts and quantitative easing in Europe. Lower commodity prices will boost growth in some countries. The Bank also believes that strong growth will resume in the United States after a weak first quarter, which, of course, has yet to be confirmed.

First quarter growth in Canada has been revised downward to 0.0 percent in the April MPR (from 1.5 percent growth in the January MPR); however, the second quarter is expected to see a rebound to 1.8 percent growth, revised up from earlier expectation. The Bank continues to assert that, “Underneath the effects of the oil price shock, the natural sequence of stronger non-energy exports, increasing investment, and improving labour markets is progressing.”  This will be aided by an improvement in the U.S. economy and the easing in financial conditions.

There remains a good deal of uncertainty in this sequence: While March employment in Canada improved substantially, business investment remains disappointing, manufacturing is weak—especially in the auto sector—and the improvement in trade has been less than expected.

Real GDP growth is projected to rebound in the second quarter and subsequently strengthen to average about 2 1/2 per cent on a quarterly basis until the middle of 2016. The Bank expects real GDP growth of 1.9 per cent in 2015, 2.5 per cent in 2016, and 2.0 per cent in 2017.

The impact of the decline in oil prices on GDP.

The Bank also believes the risks to the outlook are balanced, an upgrade since the last policy meeting in March. As a result of this view, they judge that the current degree of monetary stimulus is appropriate and have left rates unchanged.

I am cautiously optimistic that the Bank has got it right, but I continue to believe that the risks are on the downside for the economy and inflation.  My forecast for Canadian growth this year is 1.5 percent–below the Bank’s 1.9 percent forecast. Much hinges on the U.S. economy. The April MPRrevised down its U.S. growth forecast for this year from 3.2 percent to 2.7 percent.