In its monetary policy meet on 25th May, the Bank of Canada kept its key interest rate unchanged at 0.5 per cent as widely expected, despite a cut to its expectations for growth in the second quarter. The central bank noted that growth in the first quarter was in line with expectations and remained upbeat about a rebound in the third quarter as oil production resumes and reconstruction of the areas devastated by the fire begins.
In its preliminary assessment post the Alberta fires — its first since the disaster erupted earlier this month, the BoC said that the destruction caused by the fires, including energy-producer shutdowns, could trim about 1.25 percentage points from real gross domestic product in the April-to-June quarter ((In its April monetary policy report, the bank had predicted growth at an annual rate of 1 per cent for the second quarter). However, it noted that the setback would be temporary.
“While we don’t know the bank’s updated tracking excluding the wildfires, it’s likely that the bank is tracking a contraction for the second quarter,” TD Bank senior economist Leslie Preston said.
Central bank noted that economic adjustment to lower energy prices is ‘proving to be uneven’. The bank had previously indicated that the economic adjustment to lower oil prices could take several years. The global economy is evolving largely as expected, the Bank of Canada said, adding that the U.S. is set to return to solid growth in 2016 after a weak first quarter. United States is by far Canada’s biggest trading partner and Canada sends about three-quarters of its exports to the U.S. and depends on a healthy U.S. economy to generate demand.
“While near-term growth is expected to weaken, it is transitory and the economy looks to rebound in the third quarter. We continue to believe the BoC is on hold for the next year”, said Bank of Montreal senior economist Benjamin Reitzes.
The Bank of Canada is set to update its full outlook for the economy and inflation in its next monetary policy report on July 13, when it also makes its next rate announcement. USD/CAD extends downside on the day, trades around 1.2935 at 1200 GMT.
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