The Bank of Canada (BOC), which has cut its rate twice this year by a total of 50 basis points in response to the drag on economic activity from lower oil prices, added that "while the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are gaining momentum."
The adjustment of Canada's economy to lower prices for oil and other commodities is "expected to take considerable time," the BOC said, adding that overall activity is still underpinned by solid household spending and strength in those sectors that are exposed to the U.S. recovery.
The Canadian dollar, known as the loonie, has been weakening against the U.S. dollar for the last three years but the speed of its deprecation accelerated with last year's fall in oil prices and since June this year it has been dropping continuously.
Earlier today the loonie was trading
at 1.32 to the U.S. dollar, down 12 percent since the start of this year and
down 20 percent since the beginning of 2014.
Canada's Gross Domestic Product shrank by 0.1
percent the second quarter from the first quarter, for two consecutive quarters of
economic contraction. Compared with the second quarter of 2014, GDP rose by 1.0
percent, down from 2.0 percent in the first quarter.
The BOC said inflation was evolving in line with its forecast from July with disinflationary pressures from economic slack offset by the transitory effects of the lower Canadian dollar.
"The stimulative effects of previous monetary policy actions are working their way through the Canadian economy," the BOC said.
In July Canada's Inflation rate rose to 1.3 percent from 1.0 percent in June and off a 2015-low of 0.8
percent in April.
In its latest monetary policy report, the BOC forecast inflation of 1.4 percent by the fourth quarter of this year and by 1.9 percent by the fourth quarter of 2016, slightly below its 2.0 percent target.
The BOC in July cut its 2015 growth forecast to just over 1.0 percent from a previous forecast of 1.9 percent.
"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.
Inflation has evolved in line with the outlook in the Bank’s July Monetary Policy Report (MPR). Total CPI inflation remains near the bottom of the target range, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors. The dynamics of GDP growth in Canada outlined in July’s MPR also remain intact. The stimulative effects of previous monetary policy actions are working their way through the Canadian economy.
Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy. These adjustments are complex and are expected to take considerable time. Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports.
Increasing uncertainty about growth prospects for China and other emerging-market economies, in contrast, is raising questions about the pace of the global recovery. This has contributed to heightened financial market volatility and lower commodity prices. Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy. While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum.
Meanwhile, risks to financial stability are evolving as expected. Taking all of these developments into consideration, the Bank judges that the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent."
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