Canada holds interest rates but cuts growth forecasts

Posted on October 19, 2016

The Bank of Canada held its key interest rate steady at 0.5 per cent on Wednesday but the country’s currency – the Loonie – could be in for a volatile day of trading after policymakers cut their growth outlook for this year and next.

The decision to hold interest rates was widely expected. Instead all eyes were on the BoC’s outlook for the economy, which has struggled to cope with persistently low oil prices and sluggish export growth.

On this front, the news was decidedly downbeat.

The central bank now projects the Canadian economy to grow just 1.1 per cent this year, down from its previous expectations of 1.3 per cent, and 2 per cent in 2017, down from its earlier forecast of 2.2 per cent.

This projection implies that the economy will return to full capacity around mid-2018, far later than the the BoC had anticipated in July.

The bank said:

Looking through the choppiness of recent data, the profile for growth in Canada is now lower than projected in July’s Monetary Policy Report (MPR). This is due in large part to slower near-term housing resale activity and a lower trajectory for exports. The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment while dampening household vulnerabilities. Recent export data are improving but are not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar’s past depreciation. Growth in exports over 2017 and 2018 are projected to be slower than previously forecast, due to lower estimates of global demand, a composition of US growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms.

The Loonie – as the Canadian dollar is colloquially called – initially strengthened to trade at C$1.3064 per US dollar on the back of the rates decision. It has since pared some of that gain to trade at C$1.3088, or 0.2 per cent higher.

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