The Bank of Canada announced June 4, 2014 that it is
maintaining its target for the overnight rate at 1 per cent. In its accompanying statement, the Bank noted
that total CPI inflation has reached its 2 per cent target sooner than the Bank
had forecast due to higher energy prices and a lower Canadian dollar. On
economic growth, the Bank expects an improvement in exports in the second half
of the year as well as strengthening business investment and a soft landing in
the housing market. The Bank judges that the balance of risk in the Canadian
economy is weighted modestly to downside risk to inflation.
Inflation in Canada has started to move materially higher
in recent months, driven by a substantial increase in energy costs. At the same time, the Canadian economy has
posted disappointing growth due to slowing household spending and a drag on
exports from weakness in the United States.
However, as the Bank noted in its statement, there are good reasons to
believe that both of these trends will prove temporary. Much of first quarter economic weakness was
due to unusually severe winter weather which kept consumers at home and
construction projects delayed. As the
weather warms up, we anticipate a rebound in growth in the second quarter. As
for inflation, the impact of higher energy prices on headline CPI should fade
in coming months and the Bank has already suggested it will look past the
transitory increase in inflation. However, there does seem to be some
underlying momentum in core CPI, which if sustained will be much harder for the
Bank to ignore. For now, we anticipate the Bank will remain in neutral, leaving
rates unchanged until 2015.
Copyright BCREA – reprinted with permission
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