Central bank raises economic concerns, holds interest rate at 0.5%

Concern follows news that the economy contracted at an annual pace of 1.6% in Q2.

September 7, 2016   by CP Staff

OTTAWA — The Bank of Canada struck a note of caution Sept. 7 as it held its key interest rate target steady at 0.5% and raised concerns after the export sector disappointed earlier this year.

“While the strength in exports during July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated,” the central bank said in its rate announcement.

The central bank said the risks for inflation have “tilted somewhat to the downside” though remained roughly in line with its expectations, with total inflation below the 2% target and measures of core inflation around 2%.

TD Bank economist Brian DePratto said the Bank of Canada’s tone was more dovish than he expected.


“Interestingly, despite providing a laundry list of reasons to expect healthy growth in the second half of the year, the discussion of the Canadian growth outlook ended on the somewhat sour note that growth may disappoint their July forecast,” DePratto said.

The concern follows news last week that the economy contracted at an annual pace of 1.6% in the second quarter, worse than the 1% that had been forecast by the Bank of Canada in its July monetary policy report.

The decline came due to the Alberta wildfires in May and a drop in exports that was larger and more broad-based than expected, the central bank said. However, the economy grew in June and the latest trade figures from Statistics Canada showed export gains in July.

“While Canada’s economy shrank in the second quarter, the bank still projects a substantial rebound in the second half of the year,” the Bank of Canada said.

Since July 2015, the bank’s target for the overnight rate has been set at 0.5%. Bank of Montreal chief economist Doug Porter said the bank has “zero appetite for rate hikes.”

“The Canadian economy is facing stiffer headwinds than expected, but it is going to take a lot to rock the Bank of Canada’s boat,” Porter wrote in a note to clients.

“Still, the frank admission that exports have been a clear disappointment and that inflation risks are tilted to the downside is a notable change in tone from the bank.”

The third quarter is expected to show growth as production from the oilsands resumes after temporary shutdowns because of the wildfires and work begins on rebuilding damaged portions of Fort McMurray, Alta., and surrounding areas.

The federal government’s new Canada child benefit program is also forecast to help consumer spending, while infrastructure spending by Ottawa is expected to lend a boost in the second half of the year.

In its July monetary policy report, the Bank of Canada forecast economic growth to bounce back in the third quarter to an annual pace of 3.5% before slowing to a 2.8% pace for the last three months of the year.