Wednesday, May 25, 2016

Canada holds rate as Alberta wildfire lowers Q2 growth

    Canada's central bank left its benchmark target for the overnight unchanged at 0.50 percent, but said the "devastating" wildfires in the province of Alberta would cut about 1.25 percentage points of the country's second quarter economic growth due to the impact on oil production.
    The Bank of Canada (BOC), which cut its rate twice last year by a total of 50 basis points, added that growth in the first quarter was in line with its forecast from April - although investment remains disappointing - and growth is expected to rebound in the third quarter as oil production resumes and reconstruction begins.
    In April the BOC revised upwards its forecast for 2016 growth to 1.7 percent from a previous forecast of 1.4 percent. For 2017 it projected growth of 2.3 percent, down from 2.4 percent.
    Inflation in Canada was also roughly in line with the central bank's expectation, with core inflation close to 2 percent due to the past influence of exchange rate depreciation and excess capacity.
   Headline inflation rose to 1.7 percent in April from 1.3 percent in March while core inflation rose to 2.2 percent from 2.1 percent. The BOC targets inflation of 2.0 percent.
    Canada's dollar, known as the loonie, started falling in sync with the 2014 decline in crude oil prices and lost 16.5 percent against the U.S. dollar last year.
    But in mid-January this year the loonie started rebounding and was given further strength by the bottoming of oil prices. But since the start of this month it started to ease again and was quoted at 1.308 to the U.S. dollar today, up 5.9 percent this year.
    "While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April," the BOC said.

  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.
The global economy is evolving largely as the Bank projected in its April Monetary Policy Report (MPR). In the United States, despite weakness in the first quarter, a number of indicators, including employment, point to a return to solid growth in 2016. Financial conditions remain accommodative, with ongoing geopolitical factors contributing to fragile market sentiment. Oil prices are higher, in part because of short-term supply disruptions.
In Canada, the economy’s structural adjustment to the oil price shock continues, but is proving to be uneven. Growth in the first quarter of 2016 appears to be in line with the Bank’s April projection, although business investment and intentions remain disappointing. The second quarter will be much weaker than predicted because of the devastating Alberta wildfires. The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter. The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April.
Inflation is roughly in line with the Bank’s expectations. Total CPI inflation has risen recently, largely due to movements in gasoline prices, but remains slightly below the 2 per cent target. Measures of core inflation remain close to 2 per cent, reflecting the offsetting influences of past exchange rate depreciation and excess capacity.
Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher. Meanwhile, the risks to the Bank’s inflation projection remain roughly balanced. Therefore, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate, and the target for the overnight rate remains at 1/2 per cent."


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