Canada's central bank maintained its benchmark target for the overnight rate at 1.0 percent, as widely expected, and said that it was "neutral with respect to the timing and direction of the next change to the policy rate, which will depend on how new information influences the outlook and assessment of risks."
As expected, the Bank of Canada (BOC), which has kept its rate steady since September 2010, also raised its forecast for inflation this year while it trimmed its growth forecast in light of recent data. The central bank also dropped its earlier warnings about the downside risks to inflation.
Today's guidance by the BOC is essentially similar to the outlook from June though the words have been changed. In June the BOC said the "timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks."
The BOC now expects headline inflation to average 2.2 percent in the fourth quarter of this year, up from its April forecast of 1.9 percent, but then fluctuate between 2.0 percent in the first quarter of 2015 and 1.9 percent by the fourth quarter, slightly below the previous forecast of 2.0 percent.
Economic growth, measured by Gross Domestic Product in annual terms, is expected to be 2.4 percent in the second quarter of this year, the same as forecast in April, but then ease to 2.2 percent in the third quarter and 2.1 percent in the fourth quarter, down from previous forecasts of 2.2 and 2.3 percent, respectively.
Growth in 2015 and 2016 is then seen as slightly higher than previous forecast, averaging around 2.25 percent during 2014-2016, with the economy reaching full capacity around the middle of 2016, a little later than anticipated in April, the BOC said.
"For the inflation target to be achieved on a sustained basis in 2016, the economy must reach and remain at full capacity," the BOC said, adding that closing the output gap "is reliance on continued stimulative monetary policy and hinges critically on stronger exports and business investment."
At the same time, the BOC said risks from high household debt was still elevated even if it was moving in the right direction and was broadly consistent with a soft landing in the housing market.
Canada's headline inflation rate rose to 2.3 percent in May from 2.0 percent in April, exceeding the BOC's expectations and above its inflation target of 2.0 percent. Core inflation is lower than headline inflation but still rose to 1.73 percent in May from 1.4 percent.
But the BOC said higher-than-expected inflation rate was not due to any change in economic fundamentals but due to higher energy prices, the impact of changes in the exchange rate and other reasons specific to certain sectors.
"Over the next two years, inflation is projected to fluctuate around 2 percent as these temporary effects ease and the downward pressure on inflation from economic slack and heightened retail competition gradually dissipates," the BOC said.
Canada's GDP expanded by 0.3 percent in the first quarter of this year for annual growth of 2.22 percent, down from a rate of 2.66 percent in the previous quarter.
Compared with its previous monetary policy report from April, the BOC said in its July policy report that global growth this year would only be 2.9 percent, down from 3.3 previously forecast and 3.6 percent in 2015, down from 3.7 percent.
Weaker global growth will lead to slightly weaker growth in Canada, but the BOC said it still expects stronger global demand to help Canadian exports and business investment.