The Bank of Canada kept its key interest rate unchanged and said falling energy investment will hobble the economy through next year.
The benchmark rate on overnight loans between commercial banks remained at 0.5 percent, the central bank said in a decision Wednesday from Ottawa. Policy makers cut their 2016 growth forecast to 2 percent, from 2.3 percent, saying capital spending by oil and gas firms will probably fall 20 percent next year as weakness in commodity prices persists.
The overview comes two days after an election that brought Justin Trudeau’s Liberals to power with a mandate to embark on deficit spending to counteract damage from an oil-price shock. The central bank said a recovery has already started with exports outside of commodities boosted by interest-rate cuts in January and July and a weaker dollar, which fell again today after the decision.
“Global economic growth has been a little weaker than expected this year, but the dynamics pointing to a pickup in 2016 and 2017 remain largely intact,” policy makers led by Governor Stephen Poloz said in a statement.
Canada’s currency weakened 0.9 percent after the report to C$1.3097 per U.S. dollar at 10:24 a.m. in Toronto. Yields on two-year government bonds fell 3 basis points to 0.53 percent.
Investors are reacting to the bank’s comments signaling longer-lasting damage from lower oil prices, said Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets.
Drag Remains
“It’s pretty clear they don’t think this is behind us, it’s still a drag,” Jean said of the statement from policy makers. “There is little suggestion the bank would be ready to cut rates. It’s supportive of a status quo.”
The drop in oil prices to about $50 a barrel will cut three-quarters of a percentage point off Canada’s growth rate this year, leaving it at 1.1 percent, the central bank said. Lower gasoline prices are keeping the “trend” of inflation at between 1.5 percent and 1.7 percent, below the bank’s 2 percent target, and the risks around the inflation outlook are “roughly balanced,” policy makers said. The economy should return to full capacity around mid-2017, the bank said.
Output “contracted modestly” in the first half of the year and “has rebounded” since then, the Bank of Canada said Wednesday. The recovery is also being supported by U.S. demand, and resilient consumer spending.
Gross domestic product grew at an annualized pace of 2.5 percent in the third quarter, the bank said, up from the July prediction of 1.5 percent. Output was boosted by spending from family-benefit checks from Stephen Harper’s outgoing Conservative government, which began arriving in Canadian mailboxes in July.
GDP Forecasts
Statistics Canada reported gross domestic product grew 0.3 percent in July and 0.4 percent in June, after five-straight monthly contractions, with the rebound partly due to Alberta oil-sands producers reversing short-run production shutdowns.
The central bank cut its forecast for fourth-quarter growth to 1.5 percent, from 2.5 percent.
Growth for all of 2015 will come in at 1.1 percent, unchanged from the bank’s July forecast, and the 2017 projection was lowered to 2.5 percent from 2.6 percent.
Poloz lowered rates earlier this year as the oil shock took hold, while the Conservative government stuck to a plan to remove stimulus by eliminating a budget deficit. Poloz has declined to say whether fiscal stimulus would make his job easier. He’s due to hold a press conference Wednesday at 11:15 a.m. in Ottawa.
Deficit Shift
The central bank’s forecast was drawn up before the election results. The shift to more deficits “isn’t meaningful enough for the Bank of Canada to change its course,” said Jean of Desjardins.
Energy companies such as Suncor Energy Inc. will cut their investment spending by 40 percent this year and 20 percent next year, the bank estimates. That investment will be flat in 2017.
Twenty-seven of 28 economists surveyed by Bloomberg predicted no move Wednesday and one called for a quarter-point rate cut.
Cutting rates again to boost the economy would come at a cost: the core inflation rate has been above the bank’s 2 percent target since August 2014, and lower rates could add to existing strains from record high home prices and consumer debt burdens. The bank reiterated Wednesday that household imbalances have crept up, and they should “stabilize” over the next few quarters.
source: Bloomberg
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