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Bank of Canada Holds Rates for Now

Sep 05, 2018

The Conference Board of Canada’s Principal Economist Alicia Macdonald offers the following insights on today's Bank of Canada announcement:

Quote

“The Bank of Canada held its target for the overnight rate at 1.5 per cent this morning, a decision that was in line with market expectations. While the Bank held rates steady today, solid economic growth will allow the Bank to resume its policy tightening at the next meeting in October.”
— Alicia Macdonald, Principal Economist, The Conference Board of Canada.

Insights

  • After a weak start to the year, Canada’s economy expanded at a robust pace of 2.9 per cent in the second quarter.
  • Inflation accelerated sharply in July with overall price growth hitting 3.0 per cent. Measures of core inflation—the Bank’s preferred gauge when setting its policy—showed more subdued growth, but at an average of 2.0 per cent, core inflation remains firmly at the midpoint of the Bank’s target range.
  • The limited data we have heading into the third quarter suggests economic growth will slow in the second half of this year. Real GDP growth was flat in June, retail sales were down in nominal and real terms in June and non-energy exports continued to decline in July.
  • Even though growth is slowing after a solid second quarter, the pace of economic growth is expected to be strong enough to warrant a gradual reduction in monetary stimulus, as noted by the Bank in the statement that accompanied its policy decision.
  • Our forecast expects that the economy will continue to grow at a decent pace but the economic outlook continues to be mired in uncertainties. The most recent data points to a slowdown in business investment which is crucially needed to expand capacity given that the economy continues to operate at, or very close to, its potential. Additionally, renegotiations of NAFTA continue this week with the trade representatives, thus far, unable to reach a trilateral agreement.
  • Overall, despite the risks to the outlook, we expect that the Bank will continue to gradually raise interest rates with its next increase coming in October. 

Related Research

 

Canadian Outlook Executive Summary: Autumn 2018 is scheduled to be released week of September 17, 2018.

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