The Bank of Canada said Wednesday that a few of the pressures facing the country’s economy have eased this season because it left its benchmark interest rate unchanged Wednesday.
Bank of Canada holds key rate of interest because it waits on Ottawa’s fiscal boost
The central bank takes a wait-and-see method of the new federal government’s plans for multi-billion-dollar spending. Continue reading
The relatively optimistic outlook carries on the same tone put down in January. In those days, optimism was a more surprising avenue, as global financial markets were in the midst of a steep correction and concerns appeared to be raised about growing perils of a world recession.
But Canada’s economy isn’t out of the woods just yet. Below, the Financial Post has compiled what analysts are saying concerning the bank’s latest rate announcement.
Announcement casts doubt on rate cuts this year
The market has steadily priced the likelihood of an additional BoC rate cut over the past seven weeks, and analysts are even more doubtful on further moves. The mixture of firmer oil prices, much-improved non-resource exports, and the dawning realization that, yes, the Fed actually will raise rates this year have contributed to the change in sentiment. We would ‘t be so quick to rule out the financial institution of Canada completely: GDP growth is still well below potential (at best it’ll rise 1-1/2% this year), unemployment is grinding higher (up 0.6 ppts previously year), and also the currency’s bounce has took it off being an obstacle to rate cuts. Fiscal stimulus from Ottawa isn’t any miracle growth remedy for the economy, and then any relapse in oil prices only will expose the actual soggy growth outlook. The scalding housing market in certain cities will be a good reason for the BoC to remain put, but they seem to have washed their collective on the job that front (“last type of defence”). Overall, while this Statement doesn’t shut the door on another cut, it does absolutely nothing to advance the reason. Doug Porter, chief economist, BMO Capital Markets
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Bank seems unconcerned so far about loonie’s 9% rise against U.S. dollar this year
Perhaps the main one potential supply of intrigue heading in to the meeting was when the Bank would express concern over the appreciation in the Canadian dollar. This turned out not to be the case, as the Bank noted that the currency had averaged close to levels assumed within the January MPR. We are therefore left to conclude that the implied tightening in financial conditions because of the currency isn’t a major source of concern for the outlook for economic growth.
At the end of your day, we have seen the Bank of Canada comfortably remaining around the sidelines because of both a conservative expectation for near-term growth and also the prospect of fiscal stimulus in the future. Economic growth will remain sluggish and that we do share the Bank’s view the risk to the outlook remains tilted towards the downside. However, for the Bank to respond we’d need to see among those risks realized. David Tulk, head of global macro strategy, TD Securities
Bank waits to determine just how much federal government will expend on stimulus
Overall, we still expect the economy to struggle badly this year, managing only half the 1.4% GDP growth forecast through the Bank. When the Federal stimulus plan proves too timid as we suspect, then your Bank will have no other choice but to cut rates soon thereafter. Accordingly, we still believe that an interest rate cut next month, to 0.25%, is a distinct possibility. David Madani, senior Canada economist, Capital Economics
Improvement in non-energy exports has bank sounding more upbeat
Overall, the statement is extremely similar to the one in January, but the tone is slightly more positive, using the BoC acknowledging the improvement in non-energy exports. Moreover, today’s decision continues to claim that the BoC is patiently awaiting the announcement of the fiscal stimulus. As such, the BoC said that it has yet to incorporate the impact from the fiscal stimulus in the economic projection. Because of the Governor’s comments at the press conference in January, we believe the BoC believes that the size the fiscal package will be large enough to allow the central bank to stay around the sidelines. As a result, we feel the BoC will remain on hold for the rest of the entire year. Charles St-Arnaud, economist, Nomura Securities
