The Bank of Canada is keeping its key interest rate unchanged at 0.5 per cent as it weighs the clashing forces of falling inflation and a surprising burst of economic growth.
But the central bank warned Wednesday that both factors may be temporary.
The torrid growth in the first quarter – now on a pace to hit 4.7 per cent annual rate – will be followed by “some moderation” in the April-to-June quarter, the bank said in a statement. In April, the bank had forecast 3.8 per cent GDP growth in the first quarter.
Likewise, some of the recent inflation weakness may not last. The bank pointed out that inflation is being pushed lower by “intense retail competition,” which has led to falling food prices.
All three of the bank’s core inflation measures remain below the bank’s two per cent target – reflecting “ongoing excess capacity in the economy,” according to the statement.
Wednesday’s decision marked the 15th consecutive time since July 2015 that the central bank has left its key rate unchanged. Most economists don’t expect the bank to begin raising rates until at least early 2018.
The five-paragraph statement was generally upbeat about prospects for the economy. The bank said the global economy is gaining traction and there are encouraging signs that business investment will pick up now that the economy has largely adjusted to lower oil prices. It also highlighted the “improving” labour market, which is driving consumer spending and housing.
“Growth will gradually strengthen and broaden over the projection horizon,” the bank said.
The bank also acknowledged the hot Ontario and B.C. housing markets, noting that recent government efforts to stop speculation and risky borrowing “have yet to have a substantial cooling effect.” But it said these measures are “contributing to more sustainable debt profiles” of borrowers.
“The Bank of Canada sees an economic boom in all the wrong places,” CIBC economist Avery Shenfeld said in a research note. “Its decision to stand pat on rates lies less in any real troubles on the ground than in the uncertainties that Washington politics represent for trade.”
The bank’s generally optimistic tone is tempered a bit by the uncertainties still clouding the economic outlook. The bank is still concerned about policy changes in the U.S., including rising protectionism, renegotiation of the North American free trade agreement and deep tax cuts that could make Canada less competitive.
The statement also noted that export growth remains “subdued” as exporters continue to face “competitiveness challenges.”