No Surprise: Bank Leaves Interest Rate Untouched

No Surprise: Bank Leaves Interest Rate Untouched

As universally expected, the Bank of Canada is maintaining its target overnight rate at 0.5 per cent. It’s been at this level since mid-2015, so in other words, this is the 15th consecutive meeting where rates have remained unchanged.

In its accompanying statement, the Bank says there are still several key reasons for keeping rates at near historic lows.

One of them is that the Bank’s measure of core inflation (how much we pay for our stuff year-over-year) remains below the target of two per cent. Food prices are lower due to increased retail competition, oil prices remain under pressure, and wage growth is “subdued” according to the Bank.

The announcement also expressed concern in our southern neighbour, stating that growth in the United States during the first quarter “was weak.” And though this was anticipated, the Bank suggests this is due to temporary factors.

The Bank is sticking with a cautious tone, despite 2017 getting off to a good economic start.  The Bank does admit consumer spending and the housing sector continue to be robust on the back of an improving labour market. And despite lower wages, there are more jobs. This is relevant across regions.

It is, however, cautiously optimistic going forward, saying “The global economy continues to gain traction and recent developments reinforce the Bank’s view that growth will gradually strengthen and broaden over the projection horizon.”

“Recent data points to a rebound in the second quarter. The uncertainties outlined in the April Monetary Policy Report (MPR) continue to cloud the global and Canadian outlooks.”

The Bank was happy to see that the economy has almost completed the move to lower oil prices. And recent economic data has been positive, including indicators of business investment.

Economists respond to Bank’s positive outlook

In his note regarding the interest rate announcement, BMO Bank of Montreal Chief Economist Douglas Porter says the tone was a tad less dovish and a bit more upbeat than generally expected.

Porter says, “Overall, the focus here is much more on the positives and less so on the specific risks. The main message is that the Bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them.”

But those worried about their ability to service loans don’t need to panic just yet. Porter adds, “we expect that such a move is a long way off and continue to look for the Bank to keep rates unchanged well into next year, before finally beginning to nudge rates higher in Q2 of 2018.”

The next scheduled overnight rate target announcement is July 12, 2017.  At that time, the Bank will also give a full outlook on the economy and inflation, including risks to the projection. That will be published in the MPR at the same time.

 

 

Related Topics

Banking 101 / Economic News / RSM News

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