In line with consensus expectations from economists, the Bank of Canada left its key lending rate at 1.0%. Canada’s central bank has maintained the overnight rate at this level since September 2010.
In his first interest rate announcement, Bank of Canada Governor Stephen Poloz focused on the fact that modest global expansion is the result of contrasting prospects for economies in the developed and emerging worlds. The moderate recovery in the United States continues to rely on an appropriate balance between improving private demand and fiscal constraint. Drastic stimulus in Japan is having the expected impact, contributing to a rapid recovery in growth, whereas the euro area continues to lag. Economic expansion in China has been proceeding at a more rapid pace than in developed countries; nonetheless, growth there has slowed, putting downward pressure on commodity prices. Against this backdrop, the Bank of Canada has—like the International Monetary Fund—revised its forecast, reducing its outlook for global growth in each of the next three years.
Although the bank maintained its bias for tightening the currently accommodative monetary policy, the language it used could be seen as more dovish.
Gross Domestic Product
The forecast for Canada’s economic growth in 2013 was increased slightly, from 1.5% to 1.8%. This was thanks to stronger than expected growth in the first quarter, plus projections for improved contributions from exports, continued expansion of business investment, and sustained growth in consumer spending.
Expansion during the second quarter of the year is expected to be weakened by the impact of the floods in southern Alberta and the construction workers’ strike in Quebec. However, with the reconstruction requirements out west and the strike settled in Quebec, growth in the third quarter is expected to increase by a corresponding magnitude.
While acknowledging that recent inflation data has been weak—headline inflation was 0.7% in the 12 months to May—the bank reiterated its previous projection that as the economy returns to full capacity, core and headline inflation should both reach the 2.0% target by the middle of 2015.
The interest rate announcement had a negative impact on the Canadian dollar, which fell by slightly more than half of a cent from yesterday’s closing price of $0.9644USD.
The next scheduled announcement of the overnight rate target is September 4, 2013.