BoC downgrades its outlook for economic growth in Canada

Bank of Canada left its key policy rate unchanged at 0.50%. The Bank judges the current level of the overnight rate to be appropriate, but maintained a cautious tone in its outlook, acknowledging global risks and citing that the persistently low level of commodity prices has led to a modest downgrade to the bank's growth forecast.

The Bank's decision to leave rates unchanged was widely expected. It maintained a cautious tone, acknowledging that the Canadian economy rebounded smartly from the contraction in the first half of the year, but that it continues to adjust to lower prices for oil and other commodities. 

The current level of monetary policy stimulus is necessary to facilitate this ongoing adjustment. The downgrade to the Bank's growth outlook further out in the horizon is in line with more modest global growth and continued weakness in energy prices. 

This would typically mean the economy returning to full capacity at a later date, but the Bank also downgraded its estimate of Canada's pace of potential growth. As a result, there is little effect on the outlook for inflation.

At the same time, with the Bank now focused on a measure of underlying inflation rather than core, the performance of the economy relative to growth expectations is particularly important. 

The new forecasts in the MPR set the bar that Canada's economy must attain to see the eventual removal of monetary stimulus. If growth falls short of the mark, it could elicit further rate cuts.

"Overall, with the outlook for inflation little changed and the growth much the same as our latest outlook, the bank is expected to remain comfortably on the sidelines until the second half of 2017, when it is expected to embark on a modest pace of interest rate hikes", says TD Economics.