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Bank of Canada maintains overnight rate, wildfires will hurt economy

Staff writer ▼ | May 25, 2016
The Bank of Canada is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Bank of Canada
Canadian economy   The Canadian dollar has been fluctuating
In Canada, the economy’s structural adjustment to the oil price shock continues, but is proving to be uneven. Growth in the first quarter of 2016 appears to be in line with the Bank’s April projection, although business investment and intentions remain disappointing.

The second quarter will be much weaker than predicted because of the devastating Alberta wildfires. The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter.

The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of U.S. monetary policy and higher oil prices, it is now close to the level assumed in April.

Inflation is roughly in line with the Bank’s expectations. Total CPI inflation has risen recently, largely due to movements in gasoline prices, but remains slightly below the 2 per cent target.

Measures of core inflation remain close to 2 per cent, reflecting the offsetting influences of past exchange rate depreciation and excess capacity.

Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher.

Meanwhile, the risks to the Bank’s inflation projection remain roughly balanced. Therefore, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate, and the target for the overnight rate remains at 1/2 per cent.


 

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