Bank of Canada keeps policy rate unchanged, likely to remain on hold through 2017, 2018

As widely projected, the Bank of Canada maintained its key interest rate at 0.5 percent yesterday during the policy meeting. The Canadian central bank continues to anticipate a sound economic growth in the second half of 2016 as the economy rebounds from the setback suffered in the second quarter. The BoC seems to be highly worried regarding the global growth backdrop, especially the outlook of U.S. The central bank appears to be less certain about the outlook for U.S. business investment, underlining the weaker-than-anticipated second quarter performance.

The Bank of Canada also raised concerns about Canada’s economic outlook. The exports in second quarter were described as weaker than expected. Even if the same special factors and infrastructure activity are likely to stimulate growth in the second half of 2016, the central bank noted that “the ground lost over previous months raised the possibility that the profile for economic activity will be somewhat lower than anticipated in July”, noted TD Economics in a research report.

The BoC sees rise in financial vulnerabilities in spite of preliminary signs of ‘possible moderation in the Vancouver housing market’. Even if inflation continues to be roughly consistent with the central bank’s projections, the balance of risks around the inflation profile are witnessed as skewed to the downside relative to earlier projections, said TD Economics.

Despite what seems to be a strong momentum heading into the third quarter, the Canadian central bank kept a dovish tone in its statements yesterday. Significantly, despite giving several reasons to expect a healthy growth in the second half of 2016, the discussion of the outlook of Canada’s growth came in slightly sour. The central bank noted that the economic growth might disappoint their July projection of 3.5 percent and 2.8 percent quarter-on-quarter annualized in the third and fourth quarter respectively.

The risk on the downside to the BoC’s outlook is viewed as highly possible, and the economic growth is likely to average close to 2.5 percent in these quarters, which would be enough to begin absorbing the slack in the economy that has developed since 2015 and maintain core inflation near the central bank’s target of 2 percent, added TD Economics. The dovish tone of the central bank more likely signifies that the policy rate is not expected to be moved in the near future.

“Consistent with this, our forecast calls for the Bank of Canada to remain on hold throughout 2017 and 2018”, stated TD Economics.