Bank of Canada leaves rate unchanged, but lowers outlook on Canadian economy

October 19, 2016

On October 19, the Bank of Canada (BoC) announced that it would hold the target for the overnight rate at 0.5 per cent. The decision was widely anticipated, as reflected in market pricing prior to the announcement.

Why has the Bank reduced its economic growth outlook?   

The BoC took a more pessimistic tone in discussing the outlook for the Canadian economy, citing slower real estate-related growth and weaker-than-expected exports as the main reasons for a reduced forecast. 

The Bank now expects Canada’s economy to grow 1.1% (down from its 1.3% July prediction) in 2016, and 2.0% respectively in 2017 and 2018 (2.2% and 2.1% previously).  These updated predictions mean that the Canadian economy is not expected to reach full capacity until mid-2018.

Recently announced federal measures, intended to promote stability in the housing market, are expected to have a dampening impact on real estate transactions. The Bank also cited expectations for weaker U.S.-related export growth and reduced competitiveness of Canadian firms as rationale for a reduction in its export forecast.

The BoC also lowered its outlook for the global economy for 2016 to 2018, as weak investment demand and trade continue to dampen economic activity.  The reduced global forecast in 2017 and 2018 is driven primarily by oil-importing nations (continued lower oil prices) and other developing nations (decreased trade).

Inflation expected to remain low

The Bank expects inflation to remain subdued and within the Bank’s target range for the foreseeable future, given a moderating economic outlook.

What does this announcement mean for MD portfolios?

Overall, the Bank’s decision to maintain the rate is appropriate given a more moderate outlook for economic growth, both in Canada and globally. A low rate environment and continued accommodative stances by central banks continue to boost both the Canadian and global economies, and provide support for financial assets.

MD’s fixed-income solutions are positioned appropriately for a low-yield environment, and are designed to guard against associated risk. As part of our tactical asset allocation process, we continually monitor prospects for the global economy. Working with our asset managers, we scrutinize financial markets and macroeconomic trends, actively positioning our investments to meet the objectives of the MD funds and pools.

The impact of this announcement on MD portfolios and funds is minimal, but we will continue to watch the situation closely and make adjustments when necessary.

We encourage you to contact your MD Advisor if you have any questions.          

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