The Bank of Canada (BOC), which had maintained its rate since cutting it in July 2015, left its 2018 growth forecast unchanged at 2.1 percent from its previous forecast in October, saying the country's economy is still operating with "material excess capacity" and "significant slack in the labour market."
While the adjustment of Canada's resource sector to the fall in commodity prices, such as oil, is considered to be largely complete, the BOC said negative wealth and income effects "will persist" but fiscal measures should help support growth this year and the economy should return to full capacity will first happen around the middle of 2018.
The BOC noted the Canadian dollar had strengthened along with the U.S. dollar, saying this was "exacerbating ongoing competitiveness challenges and muting the outlook for exports."
The Canadian dollar (CAD), known as the loonie, started falling in 2013 and the fall in crude oil prices in mid-2014 accelerated this decline, with the exchange rate falling to around 1.45 per U.S. dollar in January last year.
But a rise in oil prices and signs of economic resilience has helped strengthen the loonie since then and it has firmed in the last month. Today CAD was trading at 1.31 to the U.S. dollar, up 2.3 percent from 1.34 at the start of this year and up 5.3 percent since the start of 2016.
Canada's Gross Domestic Product grew by 0.9 percent in the third quarter, reversing a 0.3 percent contraction in the second quarter. On a year-on-year basis, the economy grew by 1.3 percent in the third quarter, up from 1.1 percent in the second quarter.
Inflation in Canada has been lower than the BOC forecast in October due to a fall in food prices, but the bank expects inflation to approach its 2.0 percent target in the months ahead and remain around that level while excess capacity is slowly absorbed.
Canada's headline inflation rate eased to a lower-than-expected 1.2 percent in November from 1.5 percent in December and the BOC lowered its 2016 average estimate to 1.4 percent from October's 1.5 percent.
For 2017 the central bank also trimmed its inflation forecast to 1.8 percent from 1.9 percent, despite raising its assumption of oil prices, while the 2018 forecast was unchanged at 1.9 percent.
To better gauge the underlying trend of inflation, the central bank has adopted three new measures of core inflation instead of CPIX, which excluded eight volatile components, such as fruit, vegetables, oil and gas. The three new measures are CPI-trim, which excludes extreme price changes in a month, CPI-median, a weighted median measure, and CPI-common, which tracks common price movements across the CPI basket.