BoC keeps policy rate on hold and revises down growth outlook, unlikely to hike rate any time soon

As widely expected, the Bank of Canada kept its key policy rate on hold at 0.50 percent during its meeting yesterday. Meanwhile, the central bank revised down its economic growth outlook again citing subdued exports outlook and the effect of recent government changes to mortgage markets. The BoC now expects the economy to expand just 1.1 percent this year, as compared with its earlier forecast of 1.3 percent. For the next year, it projects the economy to grow 2 percent, downwardly revised from its previous estimate of 2.2 percent. The central bank kept the 2018 economic growth outlook unchanged at 2.1 percent.

The biggest revision was made to housing, which is now anticipated to weigh on the economy next year and negatively contribute 0.2 percentage points to the GDP growth. Earlier, the BoC expected the sector contributing 0.1 percentage points to the growth in 2017. According to the central bank, the new measures to ease the housing markets would negatively contributed 0.3 percentage points to the GDP by the end of 2018 as resale activity decelerates and construction shifts to smaller units.

Moreover, net exports were downwardly revised too due to weaker outlook for U.S. business and residential investment. However, the BoC revised up consumption, underpinned by fiscal measures, countering some of the downward revisions.

Inflation is expected to be subdued as the output gap has widened. It is likely to close only around mid-2018, a half-year later than anticipated in July, noted TD Economics. Core inflation, thus, has been downwardly revised for 2016 as well as 2017 and is unlikely to return to the target rate until 2018. Meanwhile, the BoC expects the recent weakness in the headline inflation as temporary and anticipates it to return to 2 percent by the first quarter of 2017.

The Bank of Canada continues to be cautious. It concentrated on the nation’s longer-term growth outlook, where domestic policy changes and uncertainty both indicate towards a weaker growth outlook, stated TD Economics. The central bank’s slightly dovish tone was in line with this cautious approach.

It is unlikely that the Bank of Canada will hike its interest rate any time soon, especially given its dovish tone, according to TD Economics. Meanwhile, the continued rotation of economic growth relies on the U.S. demand to drive exports. A reduction in interest rates would possibly do nothing to boost exports.

“While the balance of risks remains skewed to the downside and thus towards a cut, the bar to further monetary easing remains high and Governor Poloz will likely be happy to sit on the sidelines for some time to come”, added TD Economics.