Published: Thu, July 14, 2016
Economy | By Melissa Porter

Bank of Canada keeps interest rate steady at 0.5 percent

Bank of Canada keeps interest rate steady at 0.5 percent

The U.S. dollar moved lower against its Canadian counterpart on Wednesday, after the Bank of Canada left interest rates unchanged, although declining oil prices appeared to limit the Canadian currency's gains.

Among its predictions, the bank for the first time released numbers on the potential impact of the U.K.'s referendum last month to exit the European Union, also known as Brexit.

"If they cut the much as I think they should, it opens up the argument, 'Why aren't you cutting rates?'" said HSBC Bank of Canada Chief Economist David Watt.

In a speech last month before the so-called Brexit vote, Poloz said Canada's economy was finally making progress after limping through the effects of the slow USA recovery, a period of weak exports and the slump in commodity prices.

Overall, the domestic economy is forecast to grow by 1.3 per cent in 2016 - down from the April MPR forecast of 1.7 per cent - and by 2.2 per cent in 2017, followed by 2.1 per cent the following year, compared to the previous estimates of 2.3 per cent and 2.0 per cent, respectively. Therefore, the central bank projects economic growth in second quarter to be -1 percent and in third quarter to be 3.5 percent. Meanwhile, the central bank has lowered the economic growth projection, reflecting the effects of Alberta wildfires, Brexit and weakness in underlying economic activity.

That bounce back is also expected to be fuelled by boosts from the federal government's measures to enhance child benefits - which will support household consumption - and its commitment to increase infrastructure spending, the bank said.

"While the fundamental elements of the bank's projection are similar to those presented in April, the forecast has been revised down in light of a weaker outlook for business investment and a lower profile for exports, reflecting a downward adjustment to US investment spending".

"Overall, while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia's growth prospects".

The bank is also anticipating the country's non-resource sector to "assert itself as the dominant trend in the second half of 2016".

It is the first change in rates by Malaysia's Central Bank since it raised its rate in July 2014 and the first rate cut since March 2009. In April, the bank had predicted growth of 2.3 per cent in 2017 and two per cent in 2018.

On housing, Wednesday's report said the sharp price increases in the greater Vancouver and Toronto areas could be driving by self-reinforcing expectations, making those markets more sensitive to an adverse housing shock.

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