Canadian Manufacturing

BoC keeps benchmark rate at 0.5 per cent

The Canadian economy has grown largely in line with its October projections, said the central bank

OTTAWA—The Bank of Canada left its trend-setting interest rate unchanged Dec. 2, saying the economy is adjusting as expected to the bite of low commodity prices and weaker-than-anticipated U.S. demand.

The central bank also said Canadian inflation remains within its target range—the key determinant in its policy decisions.

As a result, its benchmark rate remains at 0.5 per cent.

The Canadian economy, the bank said, has grown largely in line with its October projections, as it continues to undergo to “a complex and lengthy adjustment” to the drop in its terms of trade.

The bank reiterated that it expects growth to moderate in the final three months of 2015 before picking up steam in early 2016.

The economy has received help from the lower Canadian dollar, the ongoing U.S. recovery and the Bank of Canada’s moves to cut rates twice this year, the bank said.

“The U.S. economy continues to grow at a solid pace, although private domestic demand has proven slightly less robust than expected,” the Bank of Canada said in a statement.

“Meanwhile, commodity prices have declined further. The ongoing terms-of-trade adjustments and shifting growth prospects across different regions are contributing to exchange-rate movements.”

The bank also highlighted economic challenges such as lower business investment in resource sectors and vulnerabilities in the housing sector, which continue to creep higher during the prolonged era of rock-bottom interest rates.

The labour market, it added, has held up well even though commodity-producing regions have suffered significant jobs losses.

“In the midst of all these adjustments, inflation is in line with the bank’s October outlook,” the bank said.

“The bank judges that the risks around the inflation profile remain roughly balanced over the projection horizon.”

The decision came a day after fresh Statistics Canada data revealed that the country emerged from the technical recession that knocked the economy into reverse over the first half of 2015.

But the readings for real gross domestic product—a common measure of economic growth—also found that the turnaround quickly showed signs of lost momentum.

This week’s data released by the federal statistical agency showed that real GDP grew at an annualized rate of 2.3 per cent during the three-month period that ended in September.

It also said the economy contracted by 0.5 per cent at a non-annualized rate in September—a drop mostly tied to Canada’s struggling manufacturing and natural resources industries.

The reading suggests real GDP for the fourth quarter could come in weaker than expected. The Bank of Canada is predicting 1.5 per cent growth for that quarter.

Analysts said below-zero growth in the fourth quarter would likely force the Bank of Canada to consider lowering its rate in the new year.

The Bank of Canada is scheduled to make its next rate announcement in January.

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