The Bank of Canada announced this morning that it is
maintaining its overnight rate at 0.5 per cent. In the press release
accompanying the decision, the Bank noted that although first quarter GDP growth
appears unexpectedly strong, it believes that strength is temporary and will
likely reverse in the second quarter. However, fiscal measures announced in the
March federal budget are anticipated to have a notable positive impact on
growth. The Bank is now forecasting that the economy will grow 1.7 per cent
this year, 2.3 per cent next year and 2 per cent in 2018. That upgrade to
growth means the output gap will close sooner than expected, likely in the
second half of 2017. That suggests a
return to the Bank's 2 per cent target for inflation along the same
time-line. Overall, the Bank judges risk
in the economy as roughly balanced. Interestingly, the Bank did not highlight
the housing sector as a risk despite frenzied activity in both Vancouver and Toronto.
A significantly upgraded economic forecast will very
likely close the door on further discussion of an impending rate cut, though
downside risks in the global economy remain.
Indeed, as the economy accelerates and the output gap closes, we expect the
Bank to move to a tightening bias. However, the Bank in unlikely to offset the
fiscal stimulus provided by the budget and so an increase in interest rates is
still some time away. If economic growth and job creation continue to surprise
to the upside, it is possible that the Bank will begin raising rates in late
2017 and we could potentially see a modest rise in mortgage rates toward the
end of this year in anticipation of tighter monetary policy.
Copyright BCREA – Reprinted with permission
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