Bank of Canada kept the benchmark interest rate unchanged at 0.50% on Wednesday, marking an unchanged monetary policy since last summer. In its monetary policy meeting statement, the central bank said that the fundamentals were in place for a pickup in the growth of the economy. However, the central bank warned that the economy was fluctuating more than usual. The central bank said, “[The Canadian economy] grew by 2.4 per cent in the first quarter but is estimated to have contracted by 1 per cent in the second quarter, pulled down by volatile trade flows, uneven consumer spending, and the Alberta wildfires.”
The central bank projects growth to bounce back to 3.50% in July through September and for the year the central bank expects growth at just over 1.30%, a lower forecast compared to its previous estimates in May.
On the influence of oil prices, the central bank said that it expects both oil price and the Canadian dollar to remain where they are for the remainder of the year.
“The Canadian economy continues to adjust to low commodity prices. The reallocation of investment and employment from the resource sector to the non-resource sector is progressing” the central bank said in its report. “The expansion of activity in the non-resource sector will assert itself as the dominant trend in the second half of 2016 as the drag from declining investment in the energy sector wanes.”
Touching upon the impact of the Brexit vote, the central bank said that the decision has the potential to hurt the Canadian economy. The central bank said that the impact of Brexit on the Canadian economy would see the GDP take a 0.10% hit this year if the outcome is orderly and does not have wider ramifications. Canada’s trade with the UK remains small and accounts for just 3.50% of exports from Canada.
On the housing markets, the Bank of Canada said that the sharp increase in housing prices in parts of the country was driven by self-reinforcing expectations.
On inflation, the Bank of Canada expects inflation which is running at 1.50% on the headline and 2.10% on the core to remain on track to return to 2% target in 2017. The central bank was seen staying on track with its assessments from April noting “the fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty.”
Following the BoC’s decision, the Canadian dollar is seen to be trading higher, up 0.48% against the US dollar. This follows a second consecutive day of declines after prices were seen trading near the support level of 1.3125 – 1.308. The further downside could be expected in the near term with support in USDCAD seen at 1.28620. The technical outlook pointed out in yesterday’s BoC rate preview remains in play, but if the downside risks increase resulting in a breakout below 1.2862, USDCAD could be looking to extend their declines further.
