Charles St-Arnaud, Research Analyst at Nomura, notes that as widely expected, the Bank of Canada (BoC) kept its policy rate unchanged at 0.5% and reiterated its neutral policy stance, saying that “the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate”. Key Quotes “This suggests that the BoC is not considering any changes to monetary policy for the foreseeable future. Interestingly, while the BoC upgraded its forecast for 2016, the statement remains very cautious. On the domestic economy, the BoC acknowledges that growth in the first quarter will be “unexpectedly strong”, with the BoC expecting 2.8% q-o-q ar. However, the BoC also cautioned that “some of that strength is due to temporary factors and is likely to reverse in the second quarter”, with growth expected at 1.0% q-o-q ar. Despite all these headwinds on the Canadian economy, the BoC raised its growth forecast for 2016 to 1.7% from 1.4%, while growth from 2017 inched lower to 2.3% from 2.4%. As a result of the stronger growth and a lower estimate of potential growth, the BoC expects the output gap to close in the second half of 2017. On inflation, the outlook remained roughly unchanged with total CPI inflation expected to remain weak because of low oil prices. On its side, core inflation is forecast to remain close to the BoC’s 2% target, as the impact of past CAD depreciation will be offset by excess capacity. Overall, while the BoC kept rates unchanged and upgraded its forecast, these higher growth expectations are mainly the result of fiscal stimulus. As such, if the impact from the fiscal stimulus is excluded, momentum in the economy looks weaker than in January. This suggests that without increased fiscal spending, the BoC would have likely needed to cut rates. Nevertheless, because of the impact of fiscal stimulus and the expected growth, we continue to believe the BoC will keep its policy rate unchanged for the rest of the year.” For more information, read our latest forex news.