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Bank of Canada maintains overnight rate of 0.5%

Bank of Canada maintains overnight rate of 0.5%

TORONTO — The Bank of Canada made a subtle change in today’s statement having maintained the overnight rate at 0.5 percent, but stipulating that the degree of policy support remains appropriate, at present, RBC Economics reported.

“The tone of the bank’s assessment appears to us to be more upbeat as policymakers gave a nod to both global and domestic conditions having improved with the bank anticipating very strong growth in the first quarter,” said Dawn Desjardins, RBC assistant chief economist.

“Moderating this enthusiasm was the persistence of subdued wage growth and the fact that the bank’s selection of core inflation measures remain below the 2 percent target,” she explained. “On inflation, the bank shifted gears citing lower food prices as the temporary factor weighing on the headline inflation rate after pointing to the rise in energy prices as being a transitory factor boosting inflation earlier in the year.”

There have signs that the economy built a good head of steam over recent quarters and that the hand off to the second quarter was solid, said Desjardins.

Hours worked recovered in April and an alternative measure of wages showed growth averaged closer to 2 percent in recent months, she noted.

“This measures is more consistent with regional employment growth and, we think, a sounder indication of the underlying trend in wage gains,” she added. “Our monitoring of the data points to growth in the economy having strengthened with real GDP growth topping 4 percent in the first quarter driven by ongoing household spending strength and a recovery in business investment. As alluded to in this morning’s statement, the data present an upside risk to the BOC’s forecast of 3.8 percent.

“While current conditions were viewed more positively, the bank continues to be concerned about the uncertainties associated with U.S. economic policy and specifically cited competitiveness challenges faced by Canadian exporters,” said Desjardins. “The bank said recent regulatory changes have not yet resulted in a substantial cooling in housing market activity though is acting as a contributing factor to household debt getting on firmer footing.

“We expect that the rule changes to be sufficient to slow housing market activity but as long as expectations for rates to remain low persist,  the risks is that hot markets will stay on a slow burn and there is little reason to expect consumer spending growth to weaken significantly,” she explained.

“With business investment picking up in the first quarter, the opportunity for the bank to shift the drivers of growth away from the financially-extended consumer may be in the offing,” Desjardins predicted. “The bank acknowledged that the current degree of monetary policy support is needed today.

“However, should the economy continue along this stronger growth path, we think it likely the bank will shift away from its neutral stance and maintain our view that the bank will be in position to raise the overnight rate in the first half of next year,” she added.

SOURCE: RBC Economics press release

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About Greg Gerber

Greg Gerber is a freelance writer and podcaster who has been writing about the RV industry since 2000. He is the former editor of RV Daily Report.

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