Highlights of the Bank of Canada decision May 25, 2016

Markets had priced an extremely low probability of a cut and no chance of a hike

Highlights:

  • Economic structural adjustment proving to be uneven
  • Geopolitical factors contributing to fragile sentiment
  • Q1 growth appears to be in-line with BOC projections
  • Alberta fires to cut Q2 GDP by 1.25 percentage points
  • Business investment and intentions remain disappointing
  • Risks around inflation profile 'roughly balanced'
  • 'Current stance of monetary policy still appropriate'
  • Housing vulnerabilities have increased
  • CAD now close to level assumed in April projections
  • A number of factors point to solid 2016 US growth despite weak Q1

There are no projections or press conference with this statement. The statement is about 40% shorter than the April 13 BOC statement.

The chatter ahead of the statement centred on a more-overt downgrade in growth prospects or the possibility of a slight dovish shift. Neither is included in the statement and the Canadian dollar is rallying on the headlines.

Below is the full text of the statement:

Bank of Canada maintains overnight rate target at 1/2 per cent

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The global economy is evolving largely as the Bank projected in its April Monetary Policy Report (MPR). In the United States, despite weakness in the first quarter, a number of indicators, including employment, point to a return to solid growth in 2016. Financial conditions remain accommodative, with ongoing geopolitical factors contributing to fragile market sentiment. Oil prices are higher, in part because of short-term supply disruptions.

In Canada, the economy's structural adjustment to the oil price shock continues, but is proving to be uneven. Growth in the first quarter of 2016 appears to be in line with the Bank's April projection, although business investment and intentions remain disappointing. The second quarter will be much weaker than predicted because of the devastating Alberta wildfires. The Bank's preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter. The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April.

Inflation is roughly in line with the Bank's expectations. Total CPI inflation has risen recently, largely due to movements in gasoline prices, but remains slightly below the 2 per cent target. Measures of core inflation remain close to 2 per cent, reflecting the offsetting influences of past exchange rate depreciation and excess capacity.

Canada's housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher. Meanwhile, the risks to the Bank's inflation projection remain roughly balanced. Therefore, the Bank's Governing Council judges that the current stance of monetary policy is still appropriate, and the target for the overnight rate remains at 1/2 per cent.