Bank of Canada Holds Key Rate at 0.5% as Economy Recovers

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OTTAWA — Bank of Canada left its key interest rate on hold Wednesday, saying it could still take “considerable time” to recover from the collapse of oil prices that has pushed the economy into a technical recession.

Governor Stephen Poloz and his policy council have already cut lending rates twice since the global plunge in crude costs — first in January with a 25-basis-point reduction to 0.75 per cent, and again in July with a similar cut to 0.5 per cent.

“The stimulative effects of previous monetary policy actions are working their way through the Canadian economy,” the central bank said in a statement accompanying its rate announcement.

“Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy,” it said.

“These adjustments are complex and are expected to take considerable time. Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports.”

Despite that optimistic view of the U.S. — Canada’s biggest trading partner and the world’s No.1 economy overall — Poloz and his policy team remain concerned about uncertain growth prospects for China, the world’s No. 2 economy and another major market for companies in this country.

“This has contributed to heightened financial market volatility and lower commodity prices,” the bank said, although a weaker Canadian dollar is “helping to absorb some of the impact” of these movements.

“While the overall export picture is still uncertain, the latest data confirm that exchange-rate-sensitive exports are regaining momentum.”

Indeed, some improvement has can be seen in recent months.

BMO Capital Markets, in an investment note ahead of Wednesday’s rate decision, said that “after a string of five consecutive negative monthly GDP prints, June blew away expectations with a 0.5-per-cent surge.”

“With preliminary July figures looking decent — strong auto production and sales and solid exports — we’re pretty comfortable with our above-consensus forecast for 2.8-per-cent Q3 growth,” BMO said.

The BoC forecast a Q3 advance of 1.5 per cent in its Monetary Policy Report, released July 15. BMO said “it’s also notable that the bank was bang on with its Q2 forecast for a 0.5-per-cent contraction.”

The central bank’s policymakers will publish their next quarterly MPR on Oct. 21, along with their latest rate decision.

Before that, however, the U.S. Federal Reserve is expected to begin raising its trendsetting lending level from near-zero.

The Fed has not lifted its key rate since 2006. But with strong employment growth and an improving economy, many forecasters see a rate launch coming as soon as Sept. 17.

Credit: Gordon Isfeld, Financial Post, September 9, 2015


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Toma Sojonky - Mortgage Advisor

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