Bank of Canada holds the overnight rate at 0.5%
The Bank of Canada announced that it would continue to hold its overnight interest rate at 0.5%. Economists were split down the middle regarding whether or not the Bank of Canada would hold or cut the rate that retail banks charge each other for short-term loans.
In maintaining its overnight rate at half a percent, the bank rate is correspondingly 0.75% and the deposit rate is 0.25%, the Bank of Canada said in its press release. Bank of Canada projects the Canadian economy will grow by about 1.5% in 2016 and 2.5% in 2017.
The Canadian dollar, or loonie, jumped half a cent following the news, but was back in the red within an hour after the Bank of Canada announced the news, reports CBC. The loonie was trading at US$0.69 against the U.S. dollar today, but The Bank of Montreal expects it to trade at US$0.72 for the foreseeable future, down from US$0.76 in its October.
Waiting for positive impacts
Many of the economists who predicted a cut in the banks overnight rate said they still anticipate that the Bank of Canada will lower rates in the near future, but that it is waiting for the new federal budget before moving forward.
In its release, the bank said that it has “not yet incorporated the positive impact of fiscal measures expected in the next federal budget,” referring to an expected influx of federal spending on infrastructure. The Liberal government under Prime Minister Justin Trudeau is expected to spend $60 billion on Ottawa’s infrastructure over the next decade, reports The Record.
“[The bank] isn’t sure about what to expect from the upcoming federal stimulus budget and prefers to wait,” said David Madani, an economist with Capital Economics in Toronto. “Or, maybe, the bank knows something that nobody else does and can’t reveal it.”
Oil’s role in future growth
Bank of Canada’s release today called lower oil prices “a setback for the Canadian economy,” stressing a need to move towards non-resource activity. A recent conference of Canadian bank executives painted a less pessimistic picture, however.
“The contagion (of low oil prices) back to the rest of the economy is nominal right now,” said Dave McKay, Royal Bank of Canada CEO. McKay believes that low commodity prices will also help to strengthen other parts of the Canadian economy, particularly tourism.
Victor Dobig, CEO of Canadian Imperial Bank of Commerce, also said the Canadian oil patch is doing a good job navigating the current situation. “Clients hare being smart,” he said. “They’ve been through this before.”
IMF downgrades Canadian growth in 2017
The International Monetary Fund lowered its expectations for Canada’s growth in 2017, yesterday, along with the outlook for the wider economy. The Canadian economy is expected to grow 1.7% in 2016, and 2.1% next year, down 0.3% from the IMF’s last release in October.