OTTAWA – Household spending and an improving U.S. economy are underpinning the Canadian economy, the Bank of Canada said Wednesday in announcing it will keep its key interest rate on hold at 0.5 per cent.
The central bank said a lower Canadian dollar has helped absorb some of the impact of lower commodity prices, which have been hurt by increasing uncertainty about growth prospects for China and other emerging markets.
“The stimulative effects of previous monetary policy actions are working their way through the Canadian economy,” said the bank, which twice cut its key interest rate by a quarter of a percentage point earlier this year.
Wednesday’s stand pat decision by the central bank was in line with the expectations of economists.
Sherry Cooper, chief economist at Dominion Lending Centres, said the central bank had been disappointed with the export sector, but more recent data has shown considerable improvement.
“That is a result of the decline in the Canadian dollar as well as the strength in the U.S. economy, both of which helped offset the negative effects of the havoc that has been wreaked in the oil sector,” she said.
Cooper said if the signs of growth for the third quarter hold steady, the Bank of Canada will likely keep its key rate on hold for a “considerable period.”
However, the Bank of Canada noted that increased uncertainty about growth in China and other emerging markets is raising questions about the pace of global recovery.
“Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy,” the central bank statement said.
The bank noted that the country’s resource sector is continuing to adjust to the lower prices, with some spillover to the rest of the economy, and that this transition is expected to take considerable time.
“Today’s statement suggests the bank remains nervous about the impact of the recent slide in commodity prices however (it) appears to be willing to be patient,” said Royal Bank assistant chief economist Dawn Desjardins.
“Encouragingly, the bank did not indicate any predisposition to revise the forecast issued in July for the economy to return to positive growth in the third quarter with this growth continuing to (the) end (of) 2017 despite the recent slip in oil prices.”
Statistics Canada reported earlier this month that the economy contracted in the second quarter in line with the Bank of Canada’s expectations.
That was followed by better than expected trade results for July and a stronger than expected jobs report for August that suggested the economy is pulling out of the slump that saw it contract in the first two quarters, putting the country into a recession.
Inflation has also ticked higher in recent months as rising food prices have offset lower gasoline prices, while core inflation — which excludes some volatile items — has been above two per cent for a year.
In its statement Wednesday, the Bank of Canada said inflation has “evolved in line” with its July monetary policy report.
Total inflation has remained near the bottom end of the Bank of Canada’s target range of between one and three per cent, due to the drop in energy prices. However, core inflation has been close to two per cent due to the drop in the Canadian dollar and some sector-specific factors, the bank said.
The Bank of Canada’s next rate announcement is set for Oct. 21 when it is also scheduled to release an updated outlook for the economy and inflation in its monetary policy report.