The Bank of Canada (BOC) has raised its rate twice this year by a total of 50 basis points and remains the only other major central bank in the world to raise rates other than the U.S. Federal Reserve as central banks slowly unwind the ultra-easy policy in the wake of the global financial crises in 2008/2009.
The BOC's rate hikes this year in July and September came in response to improving economic growth but the central bank said it would now be "guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation."
While economic growth in the second quarter was stronger and more broad-based than BOC had expected, it now expects a more sustainable pace in the second half of this year, with growth closer to potential over the next two years.
Nevertheless, the BOC raised its 2017 growth forecast for the third time and now sees 3.1 percent growth this year, up from July's forecast of 2.8 percent and 2.6 percent seen in April.
Exports and investments are expected to contribute to economic growth but the Canadian dollar has been stronger than expected, holding back some of the export growth, BOC said.
While the economy is operating close to its potential, BOC said wage and other data show there is still slack in the labor market, suggesting "there could be room for more economic growth than the Bank is projecting without inflation rising materially above target."
Canada's Gross Domestic Product grew by 1.1 percent in the second quarter from the first quarter for annual growth of 3.7 percent, up from 2.3 percent in the first quarter.
For 2018 the BOC also raised its growth forecast to 2.1 percent from a previous 2.0 percent but for 2019 the growth forecast was lowered to 1.5 percent from 1.6 percent.
Inflation has been picking up in recent months, reflecting the improving economy and higher gasoline prices but the higher Canadian dollar has led the BOC to trim its forecast.
Headline inflation is seen at 1.4 percent in the fourth quarter of this year, down from a previous forecast of 1.6 percent but then rising to 2.1 percent in the fourth quarter of next year, up from 2.0 percent forecast in July. For the fourth quarter of 2019 inflation is seen remaining at 2.1 percent.
Canada's CPI inflation rate rose for the third consecutive month in September to 1.6 percent - below the BOC's 2.0 percent target - while core inflation fell to 0.8 percent from 0.9 percent to the lowest level since December 1984.
After falling sharply in 2014 and 2015 on lower global oil prices, Canada's dollar has been rising since May this year in anticipation of higher BOC rates but then given back some of these gains in the last two months.
Today
the Canadian dollar, known as the loonie, was trading at 1.27 to the U.S.
dollar, down from around 1.21 in early September but still 5.5 percent up from
the start of this year.
In response to the BOC's decision, the loonie
The Bank of Canada published the following statement:
"The
Bank of Canada today maintained its target for the overnight rate at 1 per
cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is
3/4 per cent.
Inflation
has picked up in recent months, as anticipated in the Bank’s July Monetary
Policy Report (MPR), reflecting stronger economic activity and higher
gasoline prices. Measures of core inflation have edged up, in line with a
narrowing output gap and the diminishing effects of lower food prices. The Bank
projects inflation will rise to 2 per cent in the second half of 2018. This is
a little later than anticipated in July because of the recent strength in the
Canadian dollar. The Bank is also mindful that global structural factors could
be weighing on inflation in Canada and other advanced economies.
The
global and Canadian economies are progressing as outlined in the July MPR.
Economic activity continues to strengthen and broaden across countries. The
Bank still expects global growth to average around 3 1/2 per cent over 2017-19.
However, this outlook remains subject to substantial uncertainty about
geopolitical developments and fiscal and trade policies, notably the
renegotiation of the North American Free Trade Agreement.
Canada’s
economic growth in the second quarter was stronger than expected, and was more
broad-based across regions and sectors. Growth is expected to moderate to a
more sustainable pace in the second half of 2017 and remain close to potential
over the next two years, with real GDP expanding at 3.1 per cent in 2017, 2.1
per cent in 2018 and 1.5 per cent in 2019. Exports and business investment are
both expected to continue to make a solid contribution to GDP growth. However,
projected export growth is slightly slower than before, in part because of a
stronger Canadian dollar than assumed in July. Housing and consumption are
forecast to slow in light of policy changes affecting housing markets and
higher interest rates. Because of high debt levels, household spending is
likely more sensitive to interest rates than in the past.
The
Bank estimates that the economy is operating close to its potential. However,
wage and other data indicate that there is still slack in the labour market.
This suggests that there could be room for more economic growth than the Bank
is projecting without inflation rising materially above target.
Based
on this outlook and the risks and uncertainties identified in today’s MPR,
Governing Council judges that the current stance of monetary policy is
appropriate. While less monetary policy stimulus will likely be required over
time, Governing Council will be cautious in making future adjustments to the
policy rate. In particular, the Bank will be guided by incoming data to assess
the sensitivity of the economy to interest rates, the evolution of economic
capacity, and the dynamics of both wage growth and inflation."
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