The FINANCIAL — The Bank of Canada kept its key interest rate unchanged on October 21 but slightly lowered forecasts for the next two years due to weakness in prices for oil and other commodities and downgraded business investment plans, according to Nasdaq.
In maintaining its key rate at 0.5%, the central bank said Canada’s economy was rebounding as expected from an oil- price-driven contraction in the first half of the year. It reiterated its view that the Canadian economy will grow at a rate of 1.1% in 2015 based on growth in the second half of the year.
But its outlook further out was more pessimistic.
“Overall business investment has been revised sharply lower,” Bank of Canada Senior Deputy Governor Carolyn Wilkins said in a news conference on Wednesday. “This is because investment in the resource sector is being reduced faster than it is growing in the non-resource part of the economy.”
Canada’s resource-dependent economy contracted during each of the first two quarters of 2015, as sharply lower oil prices dragged down oil-patch investment and the value of the Canadian dollar. The central bank said Wednesday that it estimates the oil-price shock subtracted about 1.25 percentage points from growth during the first half of the year.
It said there was a “notable” widening in the output gap during the first half of the year that is persisting into the second half. Full adjustment to lower resource prices is expected to take several years, the central bank said, as more workers move into the nonresource sector.
Some economists said they were unsure gains in the nonresource sector would be enough to offset what looks like a larger-than-anticipated negative fallout from the commodity-sector swoon. “We still have our doubts,” Capital Economics said in a note, adding it isn’t ruling out another rate cut from the Bank of Canada.
The Bank of Canada’s policy outlook comes two days after a federal election in which Canadians handed the centrist Liberal Party a majority of parliamentary seats, ousting a Conservative government that was in power for nearly a decade.
Bank of Canada Governor Stephen Poloz declined to comment directly when asked how Prime Minister-elect Justin Trudeau’s promise to boost infrastructure spending, made before Monday’s election, might affect the central bank’s future rate decisions.
Earlier rate cuts and the low Canadian dollar are aiding with a transition toward growth led by the nonresource sector, the Bank of Canada said, including manufacturing and exports. The central bank cut its key interest rate twice this year, in January and July, bringing it down to 0.5%.
“Following a rebound in recent months, noncommodity exports are expected to grow at a solid pace, boosted by the strong growth in U.S. private domestic demand and the depreciation of the Canadian dollar,” the central bank said.
The Bank of Canada noted that capacity in the nonresource sector had declined during an era of high commodity prices and as a result of the financial crisis, and would need to be rebuilt.
It projected growth of 2.0% in 2016, compared with its July projection of 2.3% growth next year. For 2017, growth is pegged at 2.5% instead of 2.6%.
The central bank also said it would take until mid-2017 for the economy to return to potential, slightly longer than the first half of 2017 horizon it had earlier predicted.
Core inflation remains close to the central bank’s 2% target, the Bank of Canada said, as inflationary pressure from the weak Canadian dollar is offset by continued slack in the economy. Headline inflation is expected to be below 2% until the beginning of 2017, it added. The central bank sets its rate policy with an aim to hit and maintain 2% inflation.