Bank of Canada holds rates steady, cuts growth forecast

The central bank’s forecast was released Wednesday along with its scheduled announcement on its benchmark interest rate, which governor Stephen Poloz left at its rock-bottom level of 0.5 per cent, as expected. And that view still extends to many other countries.

Poloz has estimated the economic impact of the wildfire that erupted in May will trim at least one percentage point from annualized second quarter growth – and that it could contribute to a slight contraction.

Canada’s growth in the second quarter has been hit by wildfires in Alberta, which led to the shutdown of oil fields and uneven consumer spending, the BOC said, adding that growth was seen contracting by 1 percent before rebounding in the third quarter when growth would accelerate to 3.5 percent as oil production resumes and rebuilding begins in the city of Fort McMurray.

The nation’s economic prospects got a boost after USA payrolls data released last week suggested that the economy of Canada’s largest trading partner is in better shape than counterparts in Europe and Asia.

The July Monetary Policy Report forecasts real gross domestic product growth of 1.3 per cent in 2016, which is down from the 1.7 per cent projected in April. The currency was helped by increased oil prices and improved global risk sentiment as Britain got a new prime minister, Japan got stimulus and U.S. outlook brightened.

The central bank was having difficulties in looking through short-term uncertainty to find underlying trends and having to rely on its underlying models to forecast overall trends.

Realistically Canada should not be back to what the Bank considers normal growth until late 2017, and that is just over 2% annually, which means that interest rates will likely stay at present levels until at least then, if not into 2018, which will continue to fuel the red hot local housing market. Those estimates represent only marginal declines from the bank’s previous forecasts in its April MPR. In particular, after a weak start to 2016 the United States economy is showing signs of a rebound, with a healthy labour market and solid consumption growth.

This is the first post-Brexit decision.

“Considerable uncertainty surrounds the Brexit process, however, as well as its outcome and the broader political ramifications”. In the wake of Brexit, global markets have materially re-priced a number of asset classes.

“If they cut the forecast.as much as I think they should, it opens up the argument, ‘Why aren’t you cutting rates?'” said HSBC Bank of Canada Chief Economist David Watt. The Canada-U.S. two-year bond spread narrowed to -17.4 basis points, while the 10-year spread was at -47.1 basis points. Real GDP is expected to grow by 1.3 per cent in 2016, 2.2 per cent in 2017, and 2.1 per cent in 2018.