In its latest decision on interest rates, the Bank of Canada is maintaining the overnight lending rate at a target of 1.0%. It has also cut its growth forecast for Canada and now expects the economy will reach capacity around mid-2016, or six-months later than previously expected.
Economic growth is seen as weaker than estimated and inflation has reached the previous target levels earlier than anticipated.
In a statement, the Bank’s governor Stephen Poloz reiterated his previous comments that the current level of monetary policy stimulus reflects the balance of risks between the ongoing productivity gap in the Canadian economy and the heavily indebted household sector.
Dr. Poloz’s forward guidance on policy objectives remains neutral—that is, neither stimulative nor restrictive. The Bank continues to look for sustained domestic growth sourced from business investment and net exports, as opposed to the debt fuelled consumer spending that has been the primary cause of past expansion.
Gross Domestic Product (GDP)
The Bank projects that Canada’s economic growth will be weaker than it previously estimated in its Monetary Policy Report in April. It stated that domestic productivity is unlikely to reach full capacity until mid-2016. Specifically, it has lowered its growth expectations by 10 basis points for 2014 and 2015, respectively. It anticipates Canada’s average GDP growth to be 2.25% between 2014 and 2016.
The Bank stated that headline inflation, which has stood at 2.3% in the 12 months through May 2014, reached its target sooner than expected. This was driven by a combination of factors including geopolitical tension contributing to a rise in energy costs, food prices being elevated from supply-side factors, and the pass-through impact of a lower Canadian dollar, as compared to its U.S. counterpart.
However, the Bank noted that this inflationary pressure is viewed as transitory and not the result of sustained expansion.
One of MD Financial Management Inc.’s key themes for 2014 is to continue to closely monitor policy-maker decisions. Although the Bank of Canada decision was widely expected, supporting rationale suggests a more moderate path for policy changes across the foreseeable future. This perspective is aligned with our current portfolio positioning and will continue to be closely monitored.
The next interest rate announcement is scheduled for September 3, 2014.