BCREA ECONOMICS NOW
Bank of Canada Interest Rate Decision – July 17, 2012
The Bank of Canada has once again decided to keep its overnight rate at 1 per cent. The statement released this morning in support of the interest rate decision noted that global growth prospects have cooled since the Bank’s April Monetary Policy Report and this cooling will restrain Canadian economic activity. However, the bank also noted that domestic factors, and in particular consumption and business investment, will help support moderate growth. As we expected, the Bank lowered its forecast for economic growth in 2012 from 2.4 per cent to 2.1 per cent and to 2.3 per cent in 2013, which matches BCREA’s forecast. Despite slower growth, the Bank still expects the economy to reach full capacity by the second half of 2013, while inflation will remain at or very close to 2 per cent over the Bank’s projection horizon.
Most notable in the Bank’s statement accompanying the interest rate decision was that the Bank continues to include language suggesting a modest withdrawal of monetary stimulus (ie. rate increases) as excess slack in the economy is absorbed. This suggests that the Bank’s timeline for tightening monetary policy has not been materially changed by ongoing global economic uncertainty or recent changes to Canadian mortgage rules. Absent any serious shocks to the economy we expect the Bank to begin tightening in the first quarter of 2013.
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