The Bank of Canada is keeping its benchmark interest rate unchanged at 0.5 per cent even as it downgrades its growth outlook for Canada’s economy hit hard by plummeting oil and commodity prices.
The rate affects the saving and borrowing rates that Canadians get from their banks and other lending institutions. The central bank cut its rate twice last year in an attempt to stimulate the economy.
“Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy,” the bank said in a statement Wednesday morning.
“GDP growth likely stalled in the fourth quarter of 2015, pulled down by temporary softness in the U.S. economy, weaker business investment and several other temporary factors.”
Delayed economic growth
The central bank now expects the economy’s return to above-potential growth to be delayed until mid-2016.
“The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions,” the bank said. “National employment remains resilient despite job losses in the resource sector and household spending continues to expand.”
The central bank projects Canada’s economy will grow by about 1.5 per cent in 2016 and 2.5 per cent in 2017.
Going into Wednesday’s highly anticipated rate announcement, economists were evenly split as to whether the bank would cut again or hold the line. The Canadian dollar jumped about half a cent on the rate news, indicating that markets were worried about a rate cut, and priced it into the value of the currency.
Inflation on target
The bank justified holding the already-low rate because the key indicator in its decision — inflation — .is evolving “broadly as expected.”
Total consumer price index inflation remains near the bottom of the target range set by the central bank because the impact of lower Canadian dollar on the prices of imported goods is partially offset by as the disinflationary effects of economic slack and low consumer energy prices.
“As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017,” said the statement.
Also Wednesday, the bank released its quarterly monetary policy report (MPR), which gives a more detailed view of the bank’s views on the economy.
Among the findings of the MPR are that the bank now expects a 72-cent loonie for the foreseeable future. In October, the last time the bank put out an MPR, that was 76 cents.
With reports from The Canadian Press and CBC News
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