For the sixteenth consecutive decision, the Bank of Canada announced the overnight rate would remain at 1.0%. The decision to hold the key rate was widely anticipated.
The Governor of the Bank of Canada, Mark Carney, indicated recent global growth prospects were in line with expectations outlined in the Bank’s July Monetary Policy Report. This included a still gradual pace of economic expansion in the United States, ongoing recession in Europe and a decelerating pace of growth in China and other emerging markets.
Nonetheless, the statement indicated that the pace of growth in Canada is roughly in line with the economy’s production potential. Specifically, consumption and business spending continue to support growth, despite increasing domestic household debt levels and the external headwinds of a strong Canadian dollar and overall lower than pre-recession levels of exports.
Primarily due to the relative strength of the Canadian economy, the Bank continued to maintain its statement regarding the potential for withdrawal of some monetary policy stimulus. With risks currently skewed to the downside, however, any decision to do so would need to be weighed carefully in the context of both domestic and global economic developments.
Gross domestic product (GDP)
According to Statistics Canada, real GDP expanded at a 1.8% seasonally adjusted annualized rate in the second quarter. Expansion was supported by continued strength in business investment and overall domestic demand, while net exports continue to be a drag on the economy.
The Bank’s most recent projections for the Canadian economy are for growth of 2.1% in 2012, 2.3% in 2013 and 2.5% in 2014. According to the Bank, the economy is expected to reach full capacity in the second half of 2013.
Although core inflation has recently dipped below the Bank’s stated 2% target, reaching a year-over-year pace of 1.7% in July, today’s statement indicated that both core and headline inflation is expected to return to the 2% target as a result of the economy nearing full capacity.
Canada’s currency depreciated relative to the US dollar after the Bank’s announcement was released.
The next scheduled date for announcing the overnight rate target is October 23, 2012.