Today, the Bank of Canada has chosen to hold their key interest rate at 0.5 per cent for the third time in a row after dropping the rate twice in early 2015.
The Bank commented on three main factors aiding Canada’s economy in undergoing “a complex and lengthy adjustment to the decline in Canada’s terms of trade” – including stronger US growth, the benchmark interest rate cuts earlier this year, and the weak Canadian dollar. Core inflation is sitting at about 2 per cent as the impact of the lower loonie and slow economy offset each other, though the bank did not comment on underlying inflation.Bank of Canada Announcement
From an economic standpoint, the third quarter showed promise as Canada’s economy rebounded with GDP growth at an annualized rate of 2.3 per cent – bringing us out of the technical recession that occurred in the first half of the year with two consecutive quarters of shrinking GDP. However, it is important to note that the economy also contracted at a non-annualized rate of 0.5 per cent in September, largely due to declines in the resource sector.
In October, the Bank of Canada projected GDP growth of 2.5 per cent in the third quarter and 1.5 per cent in the fourth. Desjardins senior economist Jimmy Jean believes that although unlikely, a contraction in the fourth quarter could force the Bank to cut its key interest rate in early 2016 – citing that “October will be pivotal” in terms of predicting GDP for the end of 2015.
Interesting to note is that the U.S. Federal Reserve is soon expected to increase its key interest rate for the first time in almost 10 years. Historically, increased rates in the U.S. have been a good indicator of impending rate increases in Canada – however, “Governor Poloz is making it clear that even as the Fed hikes, Canadian rates will stay steady” says TD Economist Leslie Preston. TD Economics expects the Bank to hold rates at their current level until mid-2017.
The BoC is slated to make another announcement on January 20, 2016 when the next Monetary Policy Report will also be published. Be sure to check in with us for a summary of economic activity throughout 2015 and projections for 2016.