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Bank of Canada holds rate steady as economy adjusts to declining terms of trade

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 2, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The Bank of Canada today announced its decision to maintain its target for the overnight rate at 0.5 per cent stating financial conditions will continue to remain accommodative in Canada. The Bank Rate now stands at 3/4 per cent and the deposit rate at 1/4 per cent.

    The third quarter GDP was released yesterday. Canada’s economy grew 2.3 per cent in the third quarter, matching expectations. However, the growth shrank 0.5 per cent month on month in the last month of the third quarter. The central bank expects the growth to be moderate in the last quarter and pick up pace only in 2016.

    Growth in Canada has been in tune with the BoC’s Bank’s Monetary Policy Report (MPR) outlook. The economy continues to adjust to the decline in Canada’s terms of trade. In this process of adjustment the economy is being supported by the US recovery, a lower Canadian dollar and most importantly the Bank’s monetary policy easing adopted in the current year.

    The central bank mentioned that while the U.S. economy is continuing to grow at a “solid pace,” prices for oil and other commodities have continued to fall. The contradictory forces resulted in Canada’s economy to continue to face “a complex and lengthy adjustment” from the resulting loss of export income.

    The resource sector is battling the impact of lower commodity prices. Cuts in resource-sector spending are weighing on business investment. Significant job losses were noted in resource-producing regions, though at a national level the labor market was more resilient. In non-resource sectors, however exports are found to be picking up, particularly in exchange rate-sensitive categories.

    Declines in consumer energy prices have caused the total CPI inflation to remain near the bottom of the BoC’s range. Core inflation remains close to 2 per cent. Vulnerabilities in the household sector continue to move higher.

    The Bank has concluded that the current monetary policy is good enough to regulate the current inflation. It has therefore kept the overnight rate remains at 0.5 per cent. Canada’s central bank cannot be expected to hike rates until late 2016 or even 2017. Some economists are of the opinion that the BoC may even choose to slash rates.
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