At its latest policy decision, the Bank of Canada left interest rates on hold at 0.50%. The overall assessment was slightly more optimistic than expected despite limited downgrades to inflation and growth forecasts.
According to the central bank, the global economy is expected to regain momentum in the second half of the year and through the following two years.
The bank did downgrade the forecasts for Canadian GDP growth due to slower housing resale activity and a lower trajectory for exports. Recent improvements in exports will not be enough to make up for the ground lost in the first half of the year.
The 2016 GDP growth forecast was cut to 1.1% from 1.3% with a rate of around 2.0% in 2017 and 2018 compared with the previous 2017 forecast of 2.3%. This projection implies that the economy will not return to full capacity until around the middle of 2018, materially later than the bank anticipated at the July meeting.
According to the bank measures of core inflation remain close to 2.0% as the impact of previous currency depreciation and excess capacity offset each other. The bank expects total CPI inflation to be close to 2% from early 2017 onwards when these temporary factors have dissipated, but downward pressure on inflation will continue, while economic slack persists.
The 2017 inflation forecast was cut to 1.9% from 2.1% after a rate of 1.5% for 2016 from the previous 1.6%. Overall, the bank still considers the updated inflation outlook to be roughly balanced, albeit with heightened uncertainty.
The bank also commented that the new housing measures should mitigate the risks to the financial system over time. The overall balance of risks is still in the zone for which current monetary policy is appropriate.
Despite a slight downgrading of growth and inflation forecasts, there was no repeat of the line from July’s monetary policy report that the balance of inflation risks had shifted slightly to the downside, which suggests that the bank will be more reluctant to consider a further easing of monetary policy.
The downgrading of forecasts was also slightly less than expected, which will help support sentiment.
The Canadian dollar strengthened after the announcement with USD/CAD dipping to around 1.3060 from 1.3110.