Canadian Manufacturing

BoC holds rate at 0.5 per cent; says economy is bouncing back

Bank says the rebound is supported by long-awaited "signs of strength" in non-resource sectors and solid U.S. growth



OTTAWA—The Bank of Canada is sticking with its trend-setting interest rate amid expectations the country’s economy is bouncing back from the technical recession that kicked off 2015.

The central bank said that it kept its overnight rate at 0.5 per cent because inflation and economic activity was largely unfolding as predicted, even as low oil prices continue to weigh on the economy.

The rebound, the bank added, is supported by the long-awaited “signs of strength” in non-resource sectors, thanks to solid growth in the United States.

“Economic momentum is rebuilding,” the bank wrote in its latest monetary policy report, also released Wednesday.

But it cautioned that expansion in non-resources industries would still fall short of offsetting the impact of the oil slump.

The economy hit reverse over the first two quarters of 2015 after per-barrel prices on crude dropped by more than half.

The central bank once again pointed to robust household spending as the key driver of Canada’s economic activity. As a result, it warned the overall ratio of debt to disposable income crept higher.

It said the economy is also receiving boosts from the lower Canadian dollar and the bank’s moves earlier this year to lower its benchmark rate.

The weak start to 2015 pushed the economy into its first technical recession in six years, following declines of 0.8 per cent in the first quarter and 0.5 per cent in the second.

The bank maintained its July forecast that the economy—as measured by real gross domestic product—will grow by 1.1 per cent in 2015.

It expects real GDP to average about two per cent over the last two quarters of 2015, despite the struggles of the ever-important resource sector.

The late-2015 growth, the bank added, will materialize as the economy shakes off the bulk of the negative effects from the oil-price shock.

The economy will also be bolstered by increased consumption by families who spent the child-benefit cheques they received in the summer from the outgoing Conservative government, the bank said.

The projections in the Bank of Canada quarterly report are based on previously announced plans by the federal government—not on campaign promises made by the incoming Liberal government.

Over the longer term, however, the bank has downgraded its previous growth projections for 2016 and 2017, blaming the hits business investment and resource exports have taken from persistently low commodity prices.

The bank predicted it will take several years for the whole economy to fully adjust to the environment of cheaper commodities.

“The Canadian economy is undergoing a complex set of adjustments,” the Bank of Canada said.

“A prolonged period of deteriorating competitiveness, punctuated by the Great Recession, led to the destruction of many firms and depressed business investment outside the energy sector, resulting in significantly reduced capacity in the non-resource sector.

“It is in this context that the Canadian economy has to adjust to lower commodity prices.”

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