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Bank of Canada keeps rates on hold

The Bank of Canada announced on September 9th, 2015 that it was keeping its trend-setting target overnight lending rate at 0.5 per cent.

Little has changed since the Bank’s previous announcement and revised economic forecast published in July. Its September announcement serves as a placeholder as the Bank awaits more economic data prior to the release in October of its Monetary Policy Report which will be published two days after the federal election.

Previously, the Bank said it expected most of economic damage from the oil price shock would be “front loaded”, with the hit to economic growth being sharp but contained mostly in the first half of the year. However, in its September announcement, the Bank said that the adjustments stemming for the oil shock “are complex and are expected to take considerable time”.

This suggests that the Bank may soon revise its economic forecast in October to reflect how ongoing weakness in the oil patch may continue to offset strength in other sectors of the economy and lead to weaker than currently projected economic growth over the second half of the year.

At this point, the Bank is unlikely to be concerned with the need to fight inflation by raising interest rates. Headline inflation continues to trend near the bottom of the Bank’s target range between 1 and 3 per cent, mostly because of oil prices. Core inflation is hovering near two per cent. Underlying inflation is likely somewhere slightly below two per cent.

The Bank’s September announcement was shorter than usual and acknowledged increased uncertainty while highlighting both upside and downside risks to growth. The Bank now has until October to gauge how it thinks the economy will evolve over the rest of this year. In the meantime, interest rates will remain very supportive for household spending and the housing market.

As of September 9th, 2015, the advertised five-year lending rate stood at 4.64 per cent, unchanged from the previous Bank rate announcement on July 15th, and down 0.15 percentage points from one year ago.

The next interest rate announcement will be on October 21st, 2015, and will be accompanied by an update to the Monetary Policy report.

(CREA 09/09/2015)

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