Stand Pat Bank of Canada

As was widely expected, the Bank of Canada left overnight rates unchanged at 0.75 percent and reiterated earlier comments about the likely trajectory of the Canadian economy. The Bank is more optimistic about the economy than private sector forecasters, believing that a rebounding U.S. and global economy will spur Canadian business investment and exports in coming months.

The problem is that business investment growth has declined sharply in the wake of the oil price rout and ensuing collapse in business investment in the oil patch–a situation that is not likely to improve anytime soon.

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In addition, a marked further improvement in Canadian net exports likely awaits a further decline in the Canadian dollar, which has strengthened a bit recently with the uptick in oil prices. Although the Bank of Canada would never admit it publicly, they would welcome some slippage in the loonie to help boost trade.

The Bank continues to aver that “the underlying trend of inflation is 1.6 to 1.8 per cent, consistent with persistent slack in the economy”. They will certainly continue with the current level of monetary accommodation until the economy moves closer to fully employment and inflation moves back to the midpoint of the 1-to-3 percent target band, which is not likely until next year.

The Federal Reserve, on the other hand, will like raise rates in September. Nevertheless , the Bank will remain on the sidelines as the Fed rate move will no doubt be anticipated and put downward pressure on the Canadian dollar.

Ironically, the Bank has no direct control over longer-term interest rates, which have risen significantly in the past month or so. Five-year government bond yields, which are closely linked to domestic mortgage rates, are determined by global market forces. These yields have risen in the U.S., Canada and elsewhere from a considerably overbought position, steepening the yield curve. Thus, the Bank will get no help from credit-sensitive spending to meet its forecast for stronger growth for the rest of this year.

Article Source: Dr. Sherry Cooper Chief Economist, Dominion Lending Centres

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