The Bank of Canada announced this morning that it is holding its target for the overnight interest rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that inflation is on track to return to its target of 2 per cent by 2017, though heightened global uncertainty presents a risk to that forecast. The Bank judges the overall risks to its forecast as roughly balanced, but noted financial vulnerabilities are elevated in the greater Vancouver and Toronto areas due to rising home prices.
Economic growth in Canada appears to be slowing as expected in the second quarter. Our tracking estimate of second quarter real GDP growth is currently at -0.5 per cent following a strong start to the year. Most of the slowdown is due to disruptions caused by the Alberta wildfires which points to a strong rebound as oil production comes back on-line and the reconstruction effort begins. That rebound will be further supported by a boost of fiscal stimulus planned for the second half of the year. An improved outlook for growth and firm but low trend inflation probably rule out any further rate cuts from the Bank, particularly given that long-term interest rates have already fallen to near record lows in recent weeks. Our forecast remains that the Bank will be sidelined for the remainder of 2016 and through most if not all of 2017.
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