Bank of Canada maintains overnight rate target at 1/2 percent

The Bank of Canada recently proclaimed that it is sticking to its target of ½ per cent for the overnight rate. The deposit rate is likewise ¼ per cent while the Bank Rate is 3\4 per cent. Since complex adjustment is in progress in Canada’s economical proceeds, inflation is underway to hit 2% again. Even though there’s a mist of uncertainty all over, the fundamentals are intact for a potential growth over projection.

Along the same lines, the projected growth for worldwide economy has been tapered down a bit from Bank of Canada’s April Monetary Policy Report (MPR). Global GDP rise is forecasted to be 2.9 percent this year, 3.3 percent in 2017 and 3.5 percent in 2018. The US economy, after a frail start in 2016, is looking set for a rebound, thanks to solid consumption growth and strengthened labor market. Many asset classes have materially been re-priced across global markets after Brexit.

The quarterly growth trends have mainly been uneven in Canada. Real GDP escalated 2.4 percent in 2016 Q1 but is projected to taper down 1 percent in Q2, thumped by uneven consumer spending, volatile trade flows and Alberta wildfires. However in the third quarter a spike up to 3 ½ percent is forecasted as oil production restarts and rebuilding get underway in Fort McMurray. The Canada Child Benefit will also boost consumer spending.

The projection has been placed on the low since there is a relatively lower profile for export and weaker forecast for business investments, even though the basic elements of Bank’s forecast are almost identical to the ones released in April. This clearly indicates a downward change to investment spending in the US. Real GDP is projected to escalate by 1.3 percent this year, 2.2 percent in 2017 and 2.1 percent in 2018. The Bank is projecting more-than-potential growth from 2016 Q2, strengthened by increasing US demand and lifted by accommodative financial conditions. In addition, various fiscal measures and Federal infrastructure expenses, as declared in the March budget, will support and lift the growth.

In spite of the volatility witnessed recently, the Bank of Canada is expecting the export growth trend to continue, resulting in a boost in business investments. Higher prices of oil in the global market are assisting to stabilize the energy sector in Canada while a moderate increase is expected in household spending.

The Bank predicts somewhat delayed closure of the output gap than estimated closure in April, towards the fall of 2017. The judgment is inspired by the descending revision to business investments which reduces the profile for the potential output as well as the real GDP.

The inflation, mainly stimulated by increased consumer energy prices, has of late been a touch higher than projected but it’s still in the bottom half of the inflation-control range of the Bank. The majority of core-inflation’s measures are still around 2 percent, though would be even lower with no effect of past exchange rate depreciation.

In general, the risks to profile for inflation are somewhat balanced, though the Brexit vote implications are tough to forecast and vastly uncertain. Financial vulnerability is meanwhile rising and elevated, with predominance in Toronto and Vancouver areas. Governing Council of the Bank states that the general balance of risks is still within the range for which the existing standpoint of the monetary policy is appropriate and the overnight rate target stays at ½ percent.