The Bank of Canada kept its benchmark overnight interest rate on hold at 0.5%, as expected, noting that the “current stance of monetary policy is still appropriate” and adding that the “global economic growth is strengthening and becoming more broadly-based”.
While observing that the global economic situation had brightened since January and acknowledged “the strength of recent data”, it cautioned that “there is still considerable uncertainty about the outlook”. It also said that “material slack remains” in the Canadian labor market.
In kneejerk reaction the loonie jumped, with the USDCAD sliding below 1.327 before recouping some gains.
In its statement the BOC brought forward its forecast for the output gap closing to the first half of 2018, sooner than projected in January.
The BOC also revised the potential output downward for 2017 and 2018, while actual output was revised upward for 2017, adding that it was “too early to conclude that the economy is on a sustainable growth path”
It also cautioned that uncertain US trade policy projected to persist for “longer than previously assumed”, leading to a projected 0.5% point reduction in investment growth in 2017 and 2018.
The BOC revised export growth lower by 0.2% in both years on trade policy uncertainty, even as it raised its GDP forecast to 2.6% in 2017, up from 2.1% previously.
The central bank expects housing will contribute 0.3% points to growth in 2017, from -0.1 before, although it admitted that speculation playing larger role in Toronto housing market.
Finally, it noted that material excess capacity consistent with core inflation measures drifting downward, resulting in subdued wage growth.