Bank of Canada ‘optimistic’ about economy, stands pat on interest rate

The Bank of Canada has kept its key interest rate at 0.5 per cent, opting to wait and see how the economy performs over the next few months before moving to stimulate activity with another cut.

Governor Stephen Poloz’s decision comes against a backdrop of low oil prices, a tumbling Canadian dollar and grim prospects for economic growth. There were some expectations that Poloz would cut the rate given recent downward revisions to economic forecasts.

Poloz dropped the rate twice last year to help absorb the impact of sliding oil prices, but crude has since fallen even further, hovering below US$30 a barrel in recent days.

“Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy,” the central bank said in a statement.

Canada’s central bank is responsible for influencing interest rates charged by private banks and lenders, as well as managing other high-level monetary matters to keep the financial system and broader economy stable.

Protracted process

Despite the deterioration in economic conditions the central bank is sounding relatively upbeat, experts say.

“The text accompanying the decision continues to sound fairly optimistic,” Nick Exarhos, economist at CIBC World Markets, said.

Economic growth continues to shift away from the energy sector toward others, namely exporters and manufacturers, the bank said.

The “protracted process of reorientation towards non-resource activity is underway,” the bank said, “helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.”

“National employment remains resilient despite job losses in the resource sector and household spending continues to expand.”

The bank now expects the economy to grow by 1.5 per cent this year, while expansion moves to 2.5 per cent in 2017. But those outcomes are from certain, and will require a more meaningful pick up among non-energy exporters, experts say.

“The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain,” the central bank said.