Wednesday, January 18, 2017

Canada holds rate, raises 2017 growth forecast slightly

   Canada' s central bank left its benchmark target for the overnight rate steady at 0.50 percent, as widely expected, and while it raised its forecast for economic growth this year to 2.1 percent from a previous 2.0 percent it said "the current stance of monetary policy is still appropriate."
     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.

    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.
Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States. The Bank has made initial assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. Overall, the global economy is strengthening largely as expected and prices of some commodities, including oil, have risen. The rapid back-up in global bond yields, partly reflecting market anticipation of US fiscal expansion, has pulled up Canadian yields relative to the October Monetary Policy Report (MPR).
In contrast to the United States, Canada’s economy continues to operate with material excess capacity. While employment growth has remained firm, indicators still point to significant slack in the labour market. The resource sector’s adjustment to past commodity price declines appears to be largely complete, but negative wealth and income effects will persist. Meanwhile, the Canadian dollar has strengthened along with the US dollar against other currencies, exacerbating ongoing competitiveness challenges and muting the outlook for exports. Consumption is expected to remain solid, while residential investment will be tempered by previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields. Federal and provincial fiscal measures are still expected to support growth in 2017.
Bearing in mind the important assumptions embedded in its forecast, the Bank projects that Canada’s real GDP will grow by 2.1 per cent in both 2017 and 2018. This implies a return to full capacity around mid-2018, in line with October’s projection.
Inflation in Canada has been lower than anticipated since October, mainly because of declines in food prices. Measures of core inflation are below 2 per cent, reflecting material excess capacity in the economy. As consumer energy prices rise and the impact of lower food prices dissipates, inflation is expected to move close to the 2 per cent target in the months ahead and remain there throughout the projection horizon while excess capacity is being absorbed.
In the context of a projection that is largely unchanged, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent. Governing Council will continue to assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook."


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