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The Bank of Canada (BoC) left its overnight rate unchanged last Wednesday, as was universally expected.
The BoC also released its latest Monetary Policy Report (MPR), which I read with great interest because it provides us with the Bank’s views on the state of our economy and includes projections for where it sees both foreign and domestic economic momentum headed over the next several years.
Here are five highlights on the state of the Canadian economy from the latest MPR:
- The Bank left its forecast for Canadian GDP growth largely unchanged from its last MPR, with a few small tweaks. It is now calling for slightly weaker growth in the first half of 2015 and slightly stronger growth in the second half. The BoC further estimates that our economy will revert to a long-term potential growth rate of 2% by 2016.
- The Bank acknowledges that exports “have been gaining traction” but that “investment remains weak”. The BoC has repeatedly said that any healthy Canadian economic momentum will have to start with export-led growth which will eventually lead to increased business investment in productivity enhancements and expansion. In the latest MPR, the Bank said that business investment actually contracted for the third consecutive quarter in Q3, 2014, and reiterated its belief that this trend won’t change until businesses become more confident that today’s recovery in export demand is sustainable.
- The Bank pushed out its forecast for when our economy will return to full capacity from “around mid-2016” in the July MPR to “the second half of 2016” in its October MPR. This is an important milestone for mortgage borrowers because it is expected to be the point at which the BoC starts to raise its overnight rate, on which our variable mortgage rates are priced.
- The Bank believes that the drop in our unemployment rate “may have overstated the improvement in labour markets”. It notes that over the past year we have seen an “elevated portion of involuntary part-time workers (roughly 930,000 on average over the past year)”, that our participation rate has fallen “by roughly double what demographic shifts would suggest”, that we have seen an increase in the average duration of unemployment, and that wage growth has been weak. All of these factors “point to the persistence of [a] significant excess supply” of labour.
- The Bank notes that both core inflation and total inflation, as measured by the Consumer Price Index (CPI), are now close to its target rate of 2%, but it continues to attribute this rise to “exchange rate pass-through and other sector-specific factors”. For example, it estimates that the cheaper Loonie has added between 0.1% and 0.3% to core CPI inflation and between 0.3% and .05% to total CPI inflation, but it expects these impacts to dissipate naturally by mid-2016. The Bank believes that “excess capacity in the economy and heightened competition in the retail sector” will exert more persistent downward pressure on inflation over time, to the tune of about 0.5%.
Here were some other key points of note: