Wednesday, December 2, 2015

Canada holds rate, growth, inflation evolve as forecast

    Canada's central bank left its benchmark target for the overnight rate steady at 0.50 percent, as expected, restating its view from October that the risks surrounding the outlook for inflation were roughly balanced and risks to financial stability from rising household debt were as expected.
    The Bank of Canada (BOC), which cut its rate in January and July by a total of 50 basis points, also said economic growth was evolving broadly in line with its forecast from October with Gross Domestic Product expected to moderate in the fourth quarter of this year before moving to a rate that exceeds potential output in 2016.
    In its October policy report, the BOC forecast growth this year of just over 1 percent before rising to about 2 percent next year and 2.5 percent in 2017 as the economy adjusts to lower commodity prices, the fall in the Canadian dollar, the U.S. recovery and easy monetary policy.
    Canada's GDP rose by 0.6 percent in the third quarter from the second quarter for annual growth of 1.2 percent, up from 1.1 percent.
    Inflation is also in line with the BOC's expectations as consumer price inflation remains near the bottom of the central bank's target range of 1.0 percent due to the fall in energy prices while core inflation is close to 2 percent as the impact of the lower Canadian dollar and the output gap offset each other.
    The BOC targets inflation of 2.0 percent, plus/minus 1 percentage point.
    Headline inflation was steady at 1.0 percent in October and September while core inflation has been steady at 2.1 percent in the last three months.
    The Canadian dollar has been depreciating against the U.S. dollar since 2013 and was trading at 1.34 to the dollar today, down 13.4 percent this year alone and about 20 percent since the start of 2014.

   The Bank of Canada issued the following statement:

"The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Global economic growth is evolving essentially as the Bank had anticipated in its October Monetary Policy Report (MPR). The US economy continues to grow at a solid pace, although private domestic demand has proven slightly less robust than expected. Meanwhile, commodity prices have declined further. The ongoing terms-of-trade adjustments and shifting growth prospects across different regions are contributing to exchange rate movements.  In this context, policy divergence is expected to remain a prominent theme.
In Canada, the dynamics of growth have been broadly in line with the Bank’s MPR outlook. The economy continues to undergo a complex and lengthy adjustment to the decline in Canada’s terms of trade. This adjustment is being aided by the ongoing US recovery, a lower Canadian dollar and the Bank’s monetary policy easing this year. The resource sector is still contending with lower prices for commodities. In non-resource sectors, exports are picking up, particularly in exchange rate-sensitive categories. However, business investment continues to be weighed down by cuts in resource-sector spending. The labour market has been resilient at the national level, although with significant job losses in resource-producing regions. The Bank expects GDP growth to moderate in the fourth quarter of 2015 before moving to a rate above potential in 2016.  While bond yields are slightly higher, financial conditions remain accommodative in Canada.
In the midst of all of these adjustments, inflation is in line with the Bank’s October outlook. Total CPI inflation remains near the bottom of the Bank’s target range, owing to declines in consumer energy prices. Core inflation is close to 2 per cent as the effects of the lower dollar and the output gap continue to offset each other.
The Bank judges that the risks around the inflation profile remain roughly balanced over the projection horizon. Vulnerabilities in the household sector continue to edge higher while overall risks to financial stability are evolving as expected. Taking all of these developments into consideration, the Bank judges that the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent."


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