Interest Rate Trends Hi Res

Bank of Canada keeps rates on hold, signals oil sector to weigh on economy in 2016

The Bank of Canada announced on October 21st, 2015 that it was keeping its trend-setting target overnight lending rate at 0.5 per cent.

Since the last update of the Bank’s Monetary Policy Report (MPR) in July, Canadian economic growth has rebounded, with signs of increasing strength emerging from non-resource sectors of the economy.

By contrast, already weak investment in the resource sector has fallen further and is this trend is expected to persist well into next year. On balance, this weakness is expected to overwhelm improvement on the non-resource side next year.

As a result, the Bank has downgraded the outlook for economic growth in 2016 from 2.3 per cent to two per cent. The forecast for growth in 2017 was trimmed slightly from 2.6 per cent to 2.5 per cent, while 2015 was unchanged at 1.1 per cent.

While declining investment in the energy sector is expected to weigh on actual economic growth going forward, with the sector contracting and some firms shuttering entirely the Bank has also lowered what it thinks is the potential growth of the Canadian economy citing “capacity destruction.”

That means that while lower growth next year will take more time to absorb slack in the economy, there may now be less slack to take up. On balance, the Bank now believes “the Canadian economy can be expected to return to potential around mid-2017,” which is slightly later than was indicated in the July MPR when the economy was projected to return to full capacity sometime in the first half of 2017.

The story on inflation was little changed. Headline inflation continues to trend near the bottom of the Bank’s target range between 1 and 3 per cent, mostly because of oil prices. Core inflation is hovering near two per cent. Underlying inflation is likely in the 1.5 per cent to 1.7 per cent range – below the Bank’s two per cent target.

That means the bottom line for interest rates is likewise little changed for now. Rates can be expected to remain low for at least another year.

Interestingly, because the Federal election came just two days before this report was released, the impact of the newly elected Liberal majority and its promises to boost government spending were not incorporated in the MPR.

The Bank now has until the beginning of 2016 to monitor how promised fiscal measures may be rolled out and when before their next forecast update, along with ongoing exchange rate, export, and oil price dynamics.

As of October 21st, 2015, the advertised five-year lending rate stood at 4.64 per cent, unchanged from the previous Bank rate announcement on September 9th, and down 0.15 percentage points from one year ago.

The next interest rate announcement will be on December 2nd, 2015, while the next update to the Monetary Policy Report will be On January 20th 2016.

(CREA 21/10/2015)

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