Bank of Canada keeps rates on hold, oil sector continues to weigh on economy

The Bank of Canada announced on December 2nd, 2015 that it was keeping its trend-setting target overnight lending rate at 0.5 per cent.

Helped by interest rate cuts earlier this year, the Canadian economy rebounded in the third quarter of 2015 from two previous consecutive quarters of negative economic growth. However, the Bank expects “[economic] growth to moderate in the fourth quarter of 2015 before moving to a rate above potential in 2016.”

The Bank’s latest Monetary Policy Report published in October pegged the rate of potential Canadian economic growth in 2016 somewhere in the range 1.4% to 2.2% and forecast economic growth above that starting in the second quarter of 2016. Time will tell whether the Bank will need to further downgrade the outlook for economic growth, as it has repeatedly in recent years.

Economic growth and inflation outlooks are crucial to the timing for when the Bank will begin to raise interest rates.

In recent months, Canadian economic growth has gained strength in non-resource sectors, which are getting a boost from a weaker Canada-U.S. currency exchange rate. By contrast, resource and their supporting industries continue to face major headwinds, with oil-producing regions contending with weak oil prices, lower investment and job layoffs.

Headline inflation continues to trend near the bottom of the Bank’s target range of between 1 and 3 per cent due to persistently low oil prices. Core inflation (which strips out the most volatile price components of overall inflation) remains on target. Below the surface, the inflationary impact of the lower Canadian dollar is being offset by a growing disinflationary gap between actual and potential economic growth.

Based on the Bank’s current forecast for economic growth and inflation, financial markets are currently betting that the Bank of Canada will keep interest rates on hold throughout 2016.

As of December 2nd, 2015, the advertised five-year lending rate stood at 4.64 per cent, unchanged from the previous Bank rate announcement on October 21st, and down 0.15 percentage points from one year ago.

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