Canada holds rate, says data, investment "encouraging"

    Canada’s central bank left its benchmark target for the overnight rate at 0.50 percent, as widely expected, and described economic data as “encouraging,” including that of business investment, and that the country’s economy had now largely adjusted to lower oil prices.
     But while the Bank of Canada (BOC) was more upbeat about the economic outlook, it said inflation remains below its 2 percent target as food prices continue to decline and wage growth remains subdued, consistent with continued “ongoing excess capacity” in the economy.
      The BOC has maintained its rate since July 2015 but based on an improving economy, economists are looking for the bank to signal that it will start to tighten its policy and at least unwind two rate cuts in 2015 to cushion the economy from the fall in crude oil prices.
      In its previous statement from April, the BOC said economic growth had been faster than it expected but business investment remained well below what could be expected. Today’s statement shows that the bank is encouraged by rising business investment.
       Last month the BOC also said there was “material excess capacity” in the economy, a slightly more downbeat view than in today’s statement when it omitted “material.”
      But exports from Canada, remain subdued, as the central bank expected, and strong growth in the first quarter of this year is likely to be followed by some moderation in the second quarter.
     Canada’s dollar weakened steadily against the U.S. dollar from 2013 through 2015 before bouncing back in early 2016. But since April last year, the Canadian dollar – known as the loonie – has been trending lower although it has risen in the last month.
     The loonie was trading at 1.35 to the U.S. dollar today, largely unchanged this year but up by 3 percent since the start of 2016.
     The BOC, which will update its economic forecast in July, said low inflation was broadly as it had expected. In its April outlook, BOC forecast that inflation would dip in coming months before slowing returning to 2 percent as the output gap closes.
     Canada’s headline inflation was steady at 1.6 percent in April and March and BOC forecasts last month that inflation will average 1.9 percent this year, 2.0 percent in 2018 and 2.1 percent in 2019.
     In April the BOC raised its growth forecast for this year to 2.6 percent from 2.1 percent, up from 2016 growth of 1.4 percent. Growth in 2018 and 2019 was forecast just below 2 percent.

     The Bank of Canada issued the following statement: