Published: Thu, December 08, 2016
Economy | By Melissa Porter

Bank of Canada maintains overnight rate target at 1/2 per cent

Bank of Canada maintains overnight rate target at 1/2 per cent

The decision leaves Canada poised to trail the U.S. Federal Reserve's benchmark for the first time since 2007 next week when policy makers meet in Washington.

This is a sharp contrast to developments in the USA, which will raise rates next week.

That increase in real gross domestic product by 3.5% marked a rebound from a Q2 contraction. The world's 10th largest economy still must navigate a return to full output the bank has said will take until mid-2018.

But since then, data has shown that the economy grew faster in the third quarter than the Bank of Canada had expected.

"From a hedger's perspective, if you have (U.S. dollar) needs for the balance of this calendar year and early Q1 that are not covered, this is a great level to either begin or add to hedges".

US crude prices were down 1.16 percent at $50.34 a barrel on doubts production cuts would be deep enough to end a supply overhang that has weighed on markets for more than two years.

"For Canada, this is likely to translate into a firmer year for growth in 2017 and will likely result in the Bank maintaining the overnight rate at 0.5 per cent throughout the year".

Mr. Poloz has been supportive of the idea that fiscal measures have a role to play in boosting economic growth during a period of persistently low interest rates.

Global conditions are strengthening, the Bank of Canada said, but uncertainty remains high, leaving business confidence and investment stagnant. During Wednesday's rate announcement, Governor Stephen Poloz remarked that the election stateside has created a rapid backup in global bond yields, a sign of potential future fluctuations in the economy.

"There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States", the bank said in a statement.

It noted that household imbalances continue to rise, but said these would be mitigated over time by changes to housing finance rules.

Total CPI inflation has picked up in recent months but is slightly below expectations, largely because of lower food prices. Core inflation is close to 2% because persistent economic slack is still being offset by past exchange rate depreciation, although the latter effect is dissipating. "The Bank's Governing Council judges that the current stance of monetary policy remains appropriate".

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