Bank Of Canada Leave the Key Overnight Rate Unchanged

The economic pieces are starting to fall into place for Stephen Poloz, giving the Bank of Canada governor latitude to keep the bank’s key interest rate unchanged.

Many of the dark clouds that have hung over Mr. Poloz’s decision-making in recent months have begun to clear. Exports are rebounding, fear of a global recession is fading and the battered price of oil is on the upswing again. The federal government is also poised to inject a hefty dose of fiscal stimulus to help revive the sluggish economy in its March 22 budget.

As a result, the central bank opted to keep its key overnight interest rate unchanged at 0.5 per cent Wednesday – where it’s been since last July when it cut rates for the second time in 2015.

“The global economy is progressing largely as the bank anticipated in its January Monetary Policy report,” the bank said in a statement accompanying the rate announcement.

Mr. Poloz and other bank officials have generally welcomed the prospect of more fiscal stimulus from Ottawa, which is expected to announce a multi-year boost to infrastructure spending.

Among other things, the bank said recent inflation pressures will “likely unwind” in the months ahead, core inflation is “at or just below” its 2 per cent target, non-energy exports are gathering momentum, prices of oil and other commodities have rebounded and GDP growth was better than feared in the fourth quarter (at 0.8 per cent). Consumer spending also continues to “underpin domestic demand.”

All that has helped calm investor angst.

“Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating,” the bank said. “Although downside risks remain, the bank still expects global growth to strengthen this year and next [and] the U.S. expansion remains broadly on track.”

Both the price of oil (at roughly $37 U.S. per barrel) and the Canadian dollar (just below 75 cents U.S.) are close to levels the bank forecast in January, the statement pointed out.

Still, the bank remains concerned about a number of things, including still “very weak” business investment due to massive retrenchment in the oil sands as well as rising “financial vulnerabilities.”

“Financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway,” the bank said.

Parts of Western Canada are in recession, triggering tumbling real estate prices, rising bankruptcies and an outflow of workers drawn to Alberta’s once-booming economy. The housing market remains red-hot in Vancouver and Toronto, creating fears about affordability and an eventual price collapse.

In January, the bank forecast growth of 1.5 per cent this year in Canada and 2.5 per cent next year. The bank’s next forecast is due out April 13, which will include an assessment of the impact of Ottawa’s stimulus plan.

“The Bank of Canada tried to say as little as possible today as it waits to see what stimulus the federal budget delivers,” CIBC World Markets said in a research note.

Source:Globe and mail