Today, the Bank of Canada announced that it will maintain its overnight lending rate at 0.5 percent.
Along with the rate announcement, the Bank also released its second Monetary Policy Report of the year today – showing slightly modified projections for Canada’s GDP in 2016 and 2017.
Notably, Canada’s GDP growth in the first quarter of 2016 was much stronger than predicted. “It does appear that the positive forces at work in the economy are starting to outweigh those that are negative” the Bank said in its statement today. “First-quarter GDP growth appears to have been unexpectedly strong.” However, the Bank did attribute this unexpected strength in the economy partly towards temporary factors that are likely to reverse in the second quarter.
Despite oil prices currently sitting at higher-than-expected levels, the Bank projects even deeper cuts to investment in Canada’s energy sector in the near future.
The Monetary Policy Report released today was significantly impacted by the federal budget announced just over three weeks ago. Instead of a modest downgrade, the billions of dollars allocated towards infrastructure gave the Bank’s Governor Stephen Poloz no choice but to modify the Bank’s forecast in a positive direction. “The fiscal measures announced in the March federal budget will have a notable positive impact on the GDP” the Bank said.
“With that in mind, this was about as small a forecast upgrade as they could have chosen,” says Avery Shenfeld, CIBC’s Chief Economist.
Inflation in Canada continues to evolve largely as expected, with total CPI inflation just below the 2 percent target rate. The Bank expects inflation to decline slightly before returning to the target rate due to factors such as the low exchange rate and consumer energy prices.