Bank of Canada Interest Rate Decision

New Bank of Canada Governor Stephen Poloz stuck to the status quo this morning in his first interest rate decision, leaving the Bank's overnight target rate at 1 per cent.  The Bank expects growth in the Canadian economy to be "choppy" in the near term owing to unusual temporary factors such as flooding in Alberta, but overall its outlook for economic growth remains largely unchanged from April's projection of 1.8 per cent real GDP growth in 2013 and 2.7 per cent growth next year. The Bank expects inflation to remain subdued in the near term due to persistent excess capacity in the Canadian economy, but still expects inflation will return to its 2 per cent target in mid-2015 as previously forecast. Notably, the Bank's previous recurring statement regarding withdrawal of monetary stimulus has been altered and perhaps softened to "Over time, as the normalization of these [economic] conditions unfolds, a gradual normalization of policy interest rates can be expected."

All in all, not much has changed since the previous Bank of Canada announcement in May. Economic growth, though still not robust, has been marginally better than expected. Inflation continues to trend below 2 per cent and the labour market is adding jobs at a modest pace. Canadian household are still carrying too much debt, but are adding to that debt at a slower rate. Long-term interest rates have risen substantially in recent months, which may have some negative impact on growth, but remain very low in historical terms. Therefore, we continue to forecast no change in the Bank of Canada's target rate until next year.

Copyright BCREA -reprinted with permission