Wednesday, September 7, 2016

Canada maintains rate, sees H2 economic rebound

    Canada's central bank left its benchmark target for the overnight rate at 0.50 percent, as expected, confirming that it expects a "substantial rebound" in the economy in the second half of this year as oil production recovers, rebuilding begins in Alberta following wildfires in May and consumer spending is boosted from child benefit payments.
    The Bank of Canada (BOC), which cut its rate twice last year by a total of 50 basis points, added the risks to its inflation profile had "tilted somewhat to the downside" since its July forecast.
   And while there are signs of a possible moderation in Vancouver house prices, the BOC said financial vulnerabilities remain elevated and continue to rise.
    Canada's economy shrank by 0.4 percent in the second quarter from the first quarter as economic activity, including oil production, was hit by the Alberta fires and larger-than-expected drop in exports.
    But output is expected to pick up in the current quarter and then expand beyond its potential in the fourth quarter as the impact of federal infrastructure spending takes hold.
    However, the BOC added that while the strength in July exports was encouraging, the "ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July."
   In July the BOC lowered its forecast for Gross Domestic Product growth this year to 1.3 percent from its April forecast of 1.7 percent, and the 2017 forecast to 2.2 percent from 2.3 percent.
    The forecast for 2018 was revised upwards slightly to 2.1 percent from 2.0 previously.
    Canada's inflation rate eased to 1.3 percent in July from 1.5 percent in May and June, below the central bank's 2.0 percent target, mainly due to lower energy prices. Core inflation was steady for the third month at 2.1 percent, reflecting the offsetting effects of excess capacity and past depreciation of the Canadian dollar.
    In July the BOC forecast average 2016 inflation of 1.6 percent, rising to 2.1 percent in 2017. In 2018 inflation is seen at 2.0 percent.
    The exchange rate of the Canadian dollar, known as the loonie, has been relatively steady since May but dropped in response to the BOC's decision today. The CAD was trading at 1.29 to the U.S. dollar today, down from 1.28 yesterday, but up 7.4 percent since the start of the year.

    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 growth in the first half of 2016 was slower than the Bank had projected in its July Monetary Policy Report (MPR), although the Bank continues to expect it to strengthen gradually in the second half of this year. The US economy was weaker than expected in the second quarter, notably reflecting a contraction in business and residential investment. While a healthy labour market and solid consumption should remain supportive of growth in the rest of the year, the outlook for business investment has become less certain. Meanwhile, global financial conditions have become even more accommodative since July. 
While Canada’s economy shrank in the second quarter, the Bank still projects a substantial rebound in the second half of this year. Second-quarter GDP was pulled down by the Alberta wildfires in May and by a drop in exports that was larger and more broad-based than expected. Exports disappointed even after accounting for weaker business and residential investment in the United States, adjustments in the resource sector, and cutbacks in auto production. The economy is expected to rebound in the third quarter as oil production recovers, rebuilding commences in Alberta, and consumer spending gets an additional lift from Canada Child Benefit payments. As federal infrastructure spending starts to have more impact, growth in the fourth quarter is projected to remain above potential. While the strength in exports during July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July.  
Inflation is roughly in line with the Bank’s expectations.  Total CPI inflation is below the 2 per cent target, mainly because of the temporary effects of lower consumer energy prices. Measures of core inflation remain around 2 per cent, reflecting offsetting effects of excess capacity and past exchange rate depreciation.
On balance, risks to the profile for inflation have tilted somewhat to the downside since July. At the same time, while there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which 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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