Nobody was surprised to hear today that the Bank of Canada did not change it’s overnight rate of 1.75%. In 2017 the Bank was steadily increasing the overnight rate and was openly discussing the intention to continue doing so. However, after several successful rate hikes the Bank had to stop and take a breather. The last hike was in October and since then the Bank, and everyone else with a vested interest in the economy, has stood back and watched for signs that they can continue their plans to continue increasing rates.
Unfortunately for them, none of the signs of an economy ready for higher rates has presented themselves. At the end of last year and the start of this one Canada saw an economic slowdown. However, some speculators believe this was just a blip on the radar and that Canada is already on its way to better times. Economic activity has been picking up through the second quarter of the year, as anticipated in the Bank’s April report.
Prices in the oil market have remained above the recent lows and production has increased. Although some areas of the housing market have remained weak the rest of the market has become more stable on the whole.
The second quarter has seen improvement in job growth, exports, and consumer spending. Business investment has also firmed, but we may see a slowdown in production after the recent spike in inventories.
The ratification of CUSMA and the removal of tariffs on aluminum and steel will be good for exports and investment in Canada. But on the flip side ongoing global trade uncertainties continue to pose a threat, especially with new restrictions from China which have directly impacted Canadian exports.
For optimal economic growth the rate of inflation should ideally sit at 2.2%. Currently both Core and CPI inflation rates are sitting at 2% and are expected to remain unchanged in the coming months. This is one of many reasons the Bank has chosen not to change the overnight rate until conditions are optimal. The Bank will continue to keep a close eye on conditions in global trade, household trade, and oil markets and act accordingly.
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