Bank of Canada holds interest rate at 0.5 per cent, predicts ‘substantial rebound’ in second half
OTTAWA — Canada’s economy was a major disappointment in the first half of 2016.
The same can be said for the performance in the United States — and global growth wasn’t any better.
Even so, the Bank of Canada is not budging from its interest-rate stand, saying Wednesday it is prepared to weigh the heavy impact of the devastating Alberta wildfires and weaker exports against the anticipated boost from consumer spending and recouped oil output.
But that hint of optimism is unlikely to convince governor Stephen Poloz and his monetary council to begin pushing their trendsetting lending level higher. It now sits at 0.5 per cent, where it has been idling since July 2015.
In fact, many private-sector forecasters are not expecting any movement until well into next year.
“While Canada’s economy shrank in the second quarter, the bank still projects a substantial rebound in the second half of this year,” BOC policymakers said in their closely watched rate statement, one of eight issued throughout the year.
“Exports disappointed even after accounting for weaker business and residential investment in the United States, adjustments in the resource sector, and cutbacks in auto production,” the central bank said. Still, the economy “is expected to rebound in the third quarter as oil production recovers, rebuilding commences in Alberta and consumer spending gets an additional lift from Canada Child Benefit payments.”
Douglas Porter, chief economist at BMO Capital Markets, said “hope springs eternal for the bank, especially on the export front.”
“They still want to be upbeat, but I think reality is beating them on the head a bit.”
Poloz and his team also expect the economy to benefit from the federal government’s infrastructure program once the spending “starts to have more impact,” which should help overall growth in the fourth quarter.
“Global growth in the first half of 2016 was slower than the bank had projected in its July Monetary Policy Report, although the bank continues to expect it to strengthen gradually in the second half of this year.”
Many economists are forecasting a rebound of about 3.5 per cent in gross domestic product in the third quarter of this year, following a wildfire-led contraction of 1.6 per cent in the previous three-month period.
The fourth quarter should produce growth of around two per cent, according to forecasters, closely matching the central bank’s July forecast.
A huge cloud remains over Canada’s housing sector, however, as consumers continue to pile on debt to purchase homes at record-high prices, especially in Vancouver and Toronto.
“While there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise,” the Bank of Canada said.
Sherry Cooper, chief economist at Dominion Lending Centres, said recent data for Toronto “suggest that housing activity remained as robust as ever in August.”
“Clearly, household imbalances continue to rise and heighten financial vulnerabilities,” she said. “Given the likely path of economic growth in Canada … mortgage rates will remain low for longer.”
The bank’s next rate decision will come on Oct. 25, along with the release of its quarterly Monetary Policy Report, which will include forecasts and analysis of domestic and global economies.