The Bank of Canada (BOC), which surprised markets by cutting its rate by 25 basis points in January, said economic growth in the fourth quarter of 2014 was in line with its expectations and most of the negative impact on income and demand would appear in the first half of 2015.
"Nevertheless, data for 2014 as a whole suggest the anticipated rotation into stronger growth in non-energy exports and investment is well under way," the BOC said, adding:
"In light of these developments, the risk around the inflation profile are now more balanced and financial stability risks are evolving as expected in January."
Canada's Gross Domestic Product expanded by a faster-than-expected 0.6 percent in the fourth quarter of 2014 from the third quarter for annual growth of 2.63 percent, down from 2.75 percent, while inflation fell to 1.0 percent in January from 1.5 percent.
Canada's dollar has been falling against the U.S. dollar since July 2014 but the depreciation picked up speed following the BOC's rate cut on Jan. 21. Today the Canadian dollar strengthened following the decision to keep rates steady and was trading around 1.245 to the U.S. dollar, down 6.8 percent this 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 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.
Total CPI inflation in Canada has fallen as expected, reflecting the significant drop in oil prices. Core inflation remains close to 2 per cent and continues to be temporarily boosted by the pass-through effects of the lower Canadian dollar, as well as sector-specific factors.
The global economy is evolving broadly in line with projections in the Bank’s January Monetary Policy Report (MPR). The United States remains the main source of momentum in the global economy, while headwinds to growth linger in many regions. In this context, a growing number of central banks have taken actions to ease monetary conditions. Crude oil prices are close to the Bank’s MPR assumptions.
Canadian economic growth in the fourth quarter of 2014 was consistent with the Bank’s expectations. The oil price shock had a modest early impact on aggregate demand, and a larger effect on income. The Bank continues to expect that most of the negative impact from lower oil prices will appear in the first half of 2015, although it may be even more front-loaded than projected in January. Nevertheless, data for 2014 as a whole suggest the anticipated rotation into stronger growth in non-energy exports and investment is well underway.
Financial conditions in Canada have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments. This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar. These conditions will mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment.
In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected in January. At present, we judge that the current degree of monetary policy stimulus is still appropriate and the target for the overnight rate remains at 3/4 per cent."
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