BoC likely to continue accommodative stance, to hold policy till 2018

The Bank of Canada, on Wednesday, kept its key policy interest rate on hold at 0.5%, in line with an economy, which is seen as evolving in line with forecasts published in the January Monetary Policy Report. Global economic growth is viewed as moving ahead, consistent with the Bank of Canada's views. Meanwhile key indicators, such as the oil price and exchange rate have moved largely in line with the central bank's projections.

The Canadian economic outlook is also viewed as being consistent with the central bank's January forecasts, in spite of a slightly stronger end to 2015 than projected. The Bank of Canada also indicated towards 'gathering momentum' in non-energy exports, which is playing off against persistent weakness in business investment. Meanwhile, headline inflation is likely to trend lower in coming months, and even if past exchange rate movements have supported core inflation, economic slack is expected to have a dampening impact in future.

The central bank's decision to keep rates on hold was on par with expectations as the Canadian economy has moved in line with the BoC's expectations. Admittedly, even the Canadian dollar's recent strength was on par with the Canadian bank' expectations.

Meanwhile, the report indicated towards growing momentum in exports, but did not imply any significant affect on economic growth. This suggested that the near-term economic expectations continue to be largely same as in January, when the BoC projected around 1% growth in Q1 2016.

"We view the strong December and January gains in exports as a key driver of first quarter growth, which we expect could be in excess of 2% - a much brighter near-term outlook", says TD Economics.

In spite of a stronger near-term momentum, growth is expected to be slightly weaker than the central bank's January forecast, especially if differences in government spending assumptions are taken into account. Hence, the BoC is expected to keep its accommodative stance for some time and remain on hold into 2018.