The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 0.75 per cent. In the press release accompanying the decision, the Bank noted that temporary sector-specific factors as well as pass-through effects from a lower Canadian dollar to import-prices is keeping core inflation close to its 2 per cent target in spite of increasing slack in the economy. The Bank now expects the growth impact of low oil prices to be more front-loaded than assumed in January and for growth to rebound beginning in the second quarter with real GDP growth projected at 2.5 per cent on average through the middle of 2016. Weak first quarter growth will translate to a widening of the Canadian output gap and downward pressure on projected inflation, but the Bank expects a higher rate of growth in the second half will push the economy back onto its previous trajectory, reaching full-capacity around the end of 2016.
Since unveiling a surprise interest rate cut in January, each successive Bank of Canada announcement has brought heightened anticipation. However, stable oil prices, a low Canadian dollar and firm core inflation mean that the Bank is likely to take a wait and see approach as to the ultimate impact of low oil prices on the Canadian economy. Monetary policy generally operates with a four to six quarter lag, which is why the Bank opted to reduce its target rate in January to cushion the potential impact of low oil prices. Unless the Bank anticipates further shocks to the economy or a deepening impact on growth and employment arising from the oil sector, it may ultimately hold rates constant for the remainder of the year.
Copyright BCREA - reprinted with permission
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