Bank of Canada Maintains One Percent Target Rate – Global Growth More Moderate

October 27, 2014

The Bank of Canada has maintained the key overnight lending rate at a target of 1.0%, as expected.

In its latest rate announcement and monetary policy report, the Bank highlighted the central role of policy makers in global economic growth in recent times. Bank Governor Dr. Stephen S. Poloz said that global growth continues to depend on monetary stimulus provided by developed market economies.

The Bank also noted a weaker outlook for global growth in general, with prospects diverging across regions. Despite weakness elsewhere, the U.S. economy is gaining traction, particularly in sectors that are beneficial to Canada’s export prospects, the Bank stated.

The Bank said it weighed various risk factors—including those impacting its inflation target and financial stability risks associated with household imbalances—and concluded that the current level of policy stimulus is appropriate.

Gross Domestic Product (GDP)

For 2014, Canada’s economic expansion is expected to proceed at a faster pace than the Bank had previously forecast. This is predominantly the result of continued strength within the housing market and in consumer spending. In addition, Canada’s export-focused businesses could benefit from the U.S.’s improving economic performance.

Anticipated GDP growth for the next two years remains unchanged at 2.4% for 2015 and 2.3% for 2016. However, the combined impact from a lack of confidence for sustained global expansion and ongoing geopolitical tension have resulted in energy price weakness creating lower terms of trade for Canada. Consequently, the domestic economy is not expected to reach full capacity until the latter half of 2016.

Inflation

Both core (2.1%) and headline inflation (2.0%) remain close to the Bank’s target level in the 12 months through September 2014. Although inflation has been largely aligned with expected results, underlying pressures like sustained wage growth, remain moderate given the persistent slack in the domestic economy. Looking forward, the prospect for inflation staying near the 2.0% level is supported by the outlook for economic growth to reach full capacity over the next two years.

Next announcement

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

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