Bank of Canada maintains One Percent Target Rate – Economic Growth Weaker than Estimated

July 23, 2014

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.

Inflation

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.

Next Announcement

The next interest rate announcement is scheduled for September 3, 2014.

Bank of Canada press release

Previous Article
MD Financial Management: Chief Investment Officer Message—Emerging markets outperform amid geopolitical tension

MD’S MARKET UPDATE: MSCI EM Index climbs 4.3%; TSX rises 1.4% Emerging market equities were the top perfo...

Next Article
MD Financial Management: Chief Investment Officer Message—Canadian Equities Outpace Peers in June

MD’S MARKET UPDATE: TSX climbs 4%, Canadian dollar strengthens Canadian equities were the top-performing ...

×

Subscribe to our Newsletter

I allow MD Financial Management (including MD Financial Management Inc., MD Management Limited, MD Private Trust Company MD Life Insurance Company and MD Insurance Agency Limited), the Bank of Nova Scotia and other members of the Scotiabank group of companies (“Scotiabank Members”) to send me electronic messages (such as emails and SMS text) about their products and services, offers, events, and other valuable information as well as information about the products and services of other Scotiabank trusted partners that may be of interest to me.  This consent is being sought on behalf of each MD Financial Management and Scotiabank Member which includes any company(ies) or person(s) that form a part of the Scotiabank group of companies in the future. View the MD Privacy Policy here.
!
Thank you!
Error - something went wrong!