Bank of Canada:  Higher Interest Rates Soon?

Last month, the Central Bank of Canada (BOC) announced its latest monetary policies and its next targets for the next two years in a statement.  BOC Governor Stephen Poloz delivered a somewhat optimistic but mixed speech to journalists when presenting the July 2016 report on the Canadian economy.

According to their latest research and forecasts, the Canadian economy should pick up the slack during the second half of 2016 but growth provisions were revised downward: the real gross domestic production growth forecast is now established to 1.3 % for 2016 and 2.2 % for 2017.

Financial Vulnerabilities

Moreover, Poloz warned of “financial vulnerabilities” which could affect economic growth: namely the housing market in Toronto and Vancouver as well as the recovery from the fires in Alberta in May 2016 and the still unknown consequences to the Brexit on Canada.  The forecast for Canada GDP’s real growth has been downcast from the previous forecast made in April 2016 to 1.4%. According global economy 

However, the economic activity, in general, was raised to 2.4 % during the first semester of 2016 but experienced a fall of 1 % during the second semester of 2016.  Economic growth forecasts for the 2nd and 3d semesters of 2016 should establish itself at 1.25 %: this growth is smaller than expected in April 2016.

The financial vulnerabilities for economic growth in Canada, according to Poloz, partly have to do with the rising housing market bubble in Toronto and Vancouver.  Fires in Alberta also played a big part in the downfall of economic growth during the 2nd semester of 2016.

Canadian Oil Production

According to the Conference Board of Canada, an economic Think thank, the Fort McMurray Wildfires averaged to a lost oil production of “about 1.2 million barrels per day for 14 days”, meaning that its impact to the national GDP was about 0.06 percent of Canada’s GDP.  The province’s effort to recover and rebuild its facilities should “contribute to 0.4 percent to overall growth,” according to the Conference Board of Canada.

However, a larger context of lower oil prices, in general, affects Canada’s growth; energy policies implemented recently are trying to deal with the consequences of lower oil prices but, according to economists, those policies also have an impact on growth and it may take years for the adjustment policies to bear fruits.

Long-term Effects

According to Craig Alexander, an economist at the C.D. Howe Institute, an influential economic Think Thank in Canada, during an interview with BNN Go, one of the main problems with the fires in Alberta are that the economy will suffer its main impacts 12 to 18 months down the road, so it is hard to predict now in which direction the economy is going to go.

On top of growth forecasts, the Bank of Canada talked extensively about their inflation target which remains to keep inflation circa 2 %; it currently stands at 1.5 % from the latest data released for June 2016.  Poloz said that he hoped for the inflation’s target of 2 % to be attained and remain at that level in 2017.  The Bank of Canada renews regularly its agreement with the federal government regarding its inflation-control target and the latest agreement is due to expire in December 2016.

USD/CAD: Trends Based on Inflation?

According to various news reports and experts, the agreement will be renewed under the same circumstances of keeping inflation at 2 % for the next few years.  The C.D. Howe Institute published a report in June 2016 outlining what they thought would be the best course of action forward for the Bank of Canada’s monetary policies.

Steve Ambler, the author of this report, argued that inflation target should be kept under strict control and that the Bank should “consider alternative monetary policy frameworks, including some form of level targeting.”  As for interest rates, the Bank of Canada has no intention to raise them in the foreseeable future and keep the interest key rates at 0.5 %.  According to Alexander, the fiscal stimulus that just started (“childcare allowance”) may improve the economic growth but only very marginally and may still be hampered by other problems.