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Bank of Canada Holds 0.75% Interest Rate

The Bank of Canada maintained its target for the overnight rate at 0.75 percent on Wednesday, although further adjustment could be necessary to counteract the “complex” nature of the oil price collapse.

“Inflation in Canada continues to track the path outlined in the Bank’s April Monetary Policy Report (MPR). Total CPI inflation is near the bottom of the Bank’s 1 to 3 per cent inflation control range, largely due to the transitory effects of sharply lower energy prices.” read the Bank’s official rate statement.

Canada’s inflation rate softened in April, rising 0.8 percent annually, the government reported last week. Core inflation increased 2.3 percent, official data showed.

The Bank added, “While a weak first quarter in the United States has raised questions about that economy’s underlying strength, the Bank expects a return to solid growth in the second quarter. This will help advance the rotation of demand in Canada toward more exports and business investment. Recent indicators suggest consumption in Canada is holding up relatively well, given the impact of lower oil prices on gross domestic income.”

The Canadian economy expanded 2.4 percent annually in the fourth quarter and averaged 2.5 percent in all of 2014, but is expected to operate below capacity until the end of next year. The BOC is still assessing the broader impact of the oil price shock, which it says could take years to fully materialize. Bank Governor Stephen Poloz has described the impact of collapsing oil prices as “complex” and has warned of an “atrocious” first quarter.

Oil and gas extraction account for approximately 7 percent of Canada’s gross domestic product and 14 percent of exports. Suffice it to say, the economy is intricately tied to oil prices and the market’s supply and demand characteristics.

According to The Globe and Mail, the word “oil” appears 205 times in the BOC’s January Monetary Policy Report (MPR) and 132 times in the April report.

Oil prices have rebounded sharply since January, but remain well below where they were at this time last year. Long-term projections are dim, suggesting that oil prices will remain as they are, if not lower, through 2020.


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