Wednesday, January 20, 2016

Canada holds rates, low CAD, U.S. demand helps growth

    Canada's central bank left its benchmark target for the overnight rate unchanged at 0.50 percent, surprising many economists that had expected a rate cut in light of the hit to economic growth from the continuing fall in crude oil prices.
    The Bank of Canada (BOC), which cut rates twice last year by a total of 50 basis points, acknowledged the fall in oil prices - it was trading below $28 a barrel today - was a setback for economic activity, with growth likely stalling in the fourth quarter of 2015 due to "temporary softness in the U.S. economy, weaker business investment and several other temporary factors."
    In its January monetary policy report, the BOC cut its forecast for growth in 2016 to 1.4 percent from its October forecast of 2.0 percent, and trimmed the 2017 forecast to 2.4 percent from 2.5 percent, though growth was seen hitting 2.5 percent by the fourth quarter of next year.
    For 2015 the BOC saw growth of 1.2 percent, up from a previous 1.1 percent.
    However, it added that the lower Canadian dollar, stronger U.S. demand and its accommodative monetary policy was helping the country reorient toward non-resource activities and employment had remained resilient despite job losses in the resource sector, and household spending was expanding.
    "All things considered, therefore, the risks to the profile for inflation are roughly balanced," the BOC said, adding that financial vulnerabilities had continued to edge higher, as it expected.
    Canada's consumer price inflation rose by 1.4 percent in December from 1.0 percent in the two previous months while the core inflation rate eased to 2.0 percent, the lowest rate seen in 2015.
    The BOC, which targets inflation of 2.0 percent, plus/minus 1 percentage point, said it still expects inflation to rise to about 2 percent by early 2017 and that core inflation was close to 2 percent.
    The BOC forecast consumer price inflation of 1.4 percent for the fourth quarter of 2016, down from its previous forecast of 1.6 percent, and 1.9 percent inflation for the fourth quarter of 2017, down from 2.0 percent previously forecast.
    Unemployment was steady at 7.1 percent in December though it has been edging up since a low of 6.6 percent seen in January.
    The Canadian economy expanded by 0.6 percent in the third quarter, up from quarterly contractions seen in the first and second quarter.
    On an annual basis, Gross Domestic Product grew by 1.2 percent in the third quarter, up from 1.1 percent in the second quarter but below a 2.1 percent rate seen in the first quarter.
    The Canadian dollar has been dropping in sync with plunging crude oil prices since mid-2014, reaching levels not seen in the last decade.
    Since July 1, 2014, the dollar, known as the loonie, has depreciated 27 percent against the U.S. dollar and in 2015 it lost 16.5 percent.
    Today the loonie was trading at 1.46 to the U.S. dollar, down 4.8 percent just since the start of 2016, but firmed slightly in an immediate response to the central bank's decision to hold its rate.
    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.
Inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods. As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017. Measures of core inflation should remain close to 2 per cent.  
The dynamics of the global economy are broadly as anticipated in the Bank’s October Monetary Policy Report (MPR), with diverging economic prospects and shifting terms of trade. China continues its transition to a more sustainable growth path and the expansion in the United States is on track, despite temporary weakness in the fourth quarter of 2015. The U.S. Federal Reserve has begun to gradually withdraw its exceptional monetary stimulus. While risks to the world outlook remain and have been reflected in sharp price movements in a range of asset classes, global growth is expected to trend upwards beginning in 2016.
Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy. GDP growth likely stalled in the fourth quarter of 2015, pulled down by temporary softness in the U.S. economy, weaker business investment and several other temporary factors. The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.  National employment remains resilient despite job losses in the resource sector and household spending continues to expand. 
The Bank projects Canada’s economy will grow by about 1 1/2 per cent in 2016 and 2 1/2 per cent in 2017. The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain. The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.
All things considered, therefore, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, as expected. The Bank’s Governing Council judges that the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent."


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