The Bank of Canada (BOC), which surprised markets by cutting its rate by 25 basis points in January to counter some of the dampening impact on the economy from the fall in oil prices, added that inflation and economic growth was largely in line with its assessment in April and the "assessment of risks to the inflation profile has not materially changed."
The Canadian dollar, known as the loonie, started depreciating against the U.S. dollar in July 2014 and fell to 1.2790 in mid-March - from 1.06 at the start of 2014 - as investors speculated that the BOC could cut rates further. But a rebound in oil prices and optimistic comments by BOC Governor Stephen Poloz in April changed investors' perception and the loonie strengthened.
By mid-May the Canadian dollar had risen to 1.19 before easing back to 1.247 today, still a decline of almost 7 percent since the start of this year.
The impact of last year's halving of crude oil prices is is still having an impact on Canada's consumer price inflation, which fell to 0.8 percent in April from 1.2 percent, below the BOC's 1-3 percent inflation target range. But the BOC said core inflation remains above 2 percent - it was 2.3 percent in April - "boosted by the pass-through effects of past depreciation of the Canadian dollar."
Consistent with the "persistent slack in the economy," the BOC estimates that the underlying trend of inflation is 1.6 to 1.8 percent.
The BOC repeated that is sees economic activity picking up in the second quarter, noting that recent data suggest that consumption was holding up relatively well despite the impact of lower oil prices on overall income.
In April the BOC cut its forecast for first quarter growth to zero, but raised its forecast for second quarter growth to 1.8 percent and third quarter growth to 2.8 percent. Annual growth in the fourth quarter of 2014 was 2.63 percent, down from 2.75 percent in the third quarter.
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.
Inflation in Canada continues to track the path outlined in the Bank’s April Monetary Policy Report (MPR). Total CPI inflation is near the bottom of the Bank's 1 to 3 per cent inflation control range, largely due to the transitory effects of sharply lower energy prices. Core inflation remains above 2 per cent, boosted by the pass-through effects of past depreciation of the Canadian dollar, as well as certain sector-specific factors. Seeing through the various temporary factors, the Bank estimates that the underlying trend of inflation is 1.6 to 1.8 per cent, consistent with persistent slack in the economy.
The outlook for the Canadian economy also remains largely in line with the April MPR. While a weak first quarter in the United States has raised questions about that economy’s underlying strength, the Bank expects a return to solid growth in the second quarter. This will help advance the rotation of demand in Canada toward more exports and business investment. Recent indicators suggest consumption in Canada is holding up relatively well, given the impact of lower oil prices on gross domestic income.
Despite the recent back-up in global bond yields, financial conditions for Canadian households and firms remain highly stimulative. The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar. If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.
Although a number of complex adjustments are under way, the Bank’s assessment of risks to the inflation profile has not materially changed. Risks to financial stability remain elevated, but appear to be evolving as expected. Weighing all of these risks, the Bank judges that the current degree of monetary policy stimulus remains appropriate and therefore the target for the overnight rate remains at 3/4 per cent."
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