The Bank of Canada announced this morning that it is holding its target for the overnight interest rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that weaker than expected growth in the global economy, and in particular in the US economy, has hurt Canadian exports and business investment in the first half of the year. On inflation, the Bank noted that total CPI inflation is below its 2 per cent target mainly due to temporary effects of low energy prices while core measures of inflation remain on target. Overall, the Bank judges risks to the economy and the profile for inflation as somewhat tilted to the downside, pointing out a possible moderation in the Vancouver housing market and financial vulnerabilities associated with high household debt.
A second quarter contraction in GDP resulting from disruptions caused by Alberta wildfires should give way to a strong recovery in the second half of the year. We expect Canadian economic growth will rebound sharply as oil production normalizes and the federal government's uptick in expenditures and tax credits impacts the economy. With growth recovering and core inflation trending at or above the Bank's 2 per cent target, the Bank of Canada will very likely leave its policy rate unchanged for the foreseeable future. That said, even absent a change in the Bank's stance on monetary policy, mortgage rates may be moved modestly higher if the US Federal Reserve, as it recently signaled, raises its own policy rate this fall.
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