The Conference Board of Canada’s Principal Economist Alicia Macdonald offers the following insights on today's Bank of Canada announcement:
“The Bank maintained its target for the overnight rate at 1.75 per cent this morning while downgrading its outlook for inflation and economic growth this year. Expecting the slowdown to be temporary, the Bank noted that many parts of the economy are doing well and that interest rates will need to increase to a neutral range. This supports our view that further interest rate increases are in store this year.”
—Alicia Macdonald, Principal Economist, The Conference Board of Canada
- The Bank of Canada left its benchmark policy rate unchanged this morning while downgrading its outlook for inflation and economic growth this year.
- In its October Monetary Policy Report, the Bank forecast economic growth of 2.1 per cent, which was downgraded significantly this morning to growth of 1.7 per cent. The decline in growth expectations is owing to their projection for a weak fourth quarter of 2018 and a slow start to 2019 as the housing market and oil sector act as a drag on growth.
- On the inflation front, the Bank now expects inflation to linger below 2.0 per cent for most of this year and dip as low as 1.5 per cent in the third quarter, mainly driven by weaker gasoline prices.
- Despite the large downward revision to economic growth, the Bank’s January Monetary Policy Report states that most of the economy is operating close to capacity and that the recent slowdown in wage growth is being driven by oil-producing regions. Growth in their wage-common measure has held steady when excluding the three major oil producing provinces.
- While noting that consumer spending and the housing market have been weaker than expected, the Bank expects a solid performance in non-energy investment and exports, which will soon lead to above potential GDP growth.
- In its press release accompanying the decision, the Bank stated that interest rates will need to rise over time to a neutral range (2.5 to 3.5 per cent) but that it would pay close attention to the impact of global trade tensions, the housing market and oil markets on the economic outlook as it makes its future monetary policy decisions.
- Overall, we expect that the economy will continue to grow at a moderate pace over the coming quarters. Downside risks to the outlook remain plentiful, as described in our latest Canadian Outlook, but if economic growth unfolds as expected, two interest rate increases will be warranted this year.