OTTAWA—The battle in the Canadian economy between the resource and non-resource sectors rages on, but despite further drops in energy prices amidst financial market turmoil, the Bank of Canada held its overnight rate target at 0.50 percent on Wednesday, Oct. 21.
It was a move widely expected by economists as the Canadian economy has started growing again after a dismal first half of 2015.
Since mid-July, the time of the bank’s prior Monetary Policy Report (MPR), financial markets have gone through a volatile period of risk aversion, adjusting to China’s economic transition and its negative effect on emerging market economies.
The bank projects global growth to be slower than it estimated in July—3.4 vs. 3.7 percent in July for 2016.
Given this backdrop, the bank revised its oil price assumptions (Brent US$50, West Texas Intermediate US$45, and Western Canada Select US$30), which are $15 to $20 dollars lower than in July. The corresponding reduction in business investment and exports in the energy sector has led to a “modest downward revision to the Bank’s growth forecast for 2016 and 2017,” according to the Bank of Canada Oct. 21 statement.
The bank now projects growth of just over 1 percent in 2015, about 2 percent in 2016, and 2.5 percent in 2017.
It also expects the economy to return to full capacity and for inflation to remain at the 2 percent target starting around mid-2017. The view on inflation is essentially unchanged from September; it has evolved as the bank expected in July. The underlying trend in inflation continues to be in the 1.5 to 1.7 percent range.
