BoC cuts growth forecast to 1.4% y/y in 2016 and 2.4% y/y in 2017

The Canadian central bank has kept its overnight rate unchanged at 0.5% on balanced inflation risks. According to the bank, the inflation trend has been near to its projections. Canada's headline inflation continues to be around 1%, whereas the core inflation is around 2%. The Bank of Canada forecasts headline inflation to reach the target's mid-point in early 2017, same as its earlier assessment in October.

The Canadian economic growth was flat in Q4 2015 due to weaker commodity prices along with somewhat weaker US activity. The central bank anticipates the economic growth to be weighed on by the lower oil prices. It has revised its growth forecast downwards to 1.4% y/y in 2016 and 2.4% in 2017, as compared with its earlier forecast of 2% growth in 2016 and 2.5% in 2017. Meanwhile, the output gap is likely to close by late 2017. The inflation outlook continues to remain the same.

The Bank of Canada contemplates that rebalancing the economy from the energy sector will give help in the coming months, in spite of the weak outlook for aggregate growth. Employment and output are moving ahead on different lines, while the Canadian dollar's depreciation and resilience of the non-resource sector are likely to offset the fall in energy sector.

On a global scale, macroeconomic prospect requires very easy financial conditions. Due to lower commodity prices and risks skewed towards lower growth in the global economy, inflation is not expected to reach the target rate set by central banks, mainly in those countries where labor and economic slack is still present.

"After this meeting, we no longer expect a front-loaded ease in financial conditions, but argue that a more active BoC is likely needed to assure that inflation expectations remain anchored", says Barclays.