The Canadian central bank yesterday maintained its key interest rate at 0.5%, on par with expectations. The Bank of Canada noted that the outline of the nation’s outlook has been altered amidst the Northern Alberta wildfires, however; it stated that risks to the outlook of inflation continue to be “roughly balanced”.
Even though the Canadian first quarter growth seems to be consistent with the Monetary Policy Report of April, the BoC anticipates that the Northern Alberta wildfires will subtract around 1.25 percentage points from the economic growth in the second quarter, noted TD Economics in a research report.
The Monetary Policy Report had anticipated 1% growth on a quarterly annualized basis. It is a possibility that the central bank is tracking a growth contraction for the second quarter, said TD Economics. The BoC projects the economic growth to recover in the third quarter as reconstruction starts and oil production resumes.
Moreover, the global economy is growing widely as anticipated in the April MPR. The Bank of Canada projects the US economy to return to strong growth after expanding softly at the beginning of the year. According to the central bank, Canada’s structural adjustment to the oil price shock is uneven. It emphasized that the softness recorded recently in Statistics Canada’s investment intentions survey as upsetting.
Inflation is consistent with BoC’s projections. Core inflation measures continue to be close to 2%, indicating countering influences of excess capacity and past CAD depreciation, added TD Economics. Meanwhile, the central bank stated that financial vulnerabilities have increased.
The central bank has again highlighted the difficult adjustment that the economy is going through due to the oil price shock. Overall, major economic slack continues, while external threats to the economic growth remain. This requires the current stance of accommodative monetary policy, according to TD Economics.
There was a muted reaction by the market to the BoC’s projected move of keep rates on hold. The central bank’s statement gave a slight more lucidity regarding the BoC’s assessment of the wildfires effects. However, the central bank is expected to keep rates on hold for some time.