The effect of inflation on Canadian interest rate
Bank of Canada Interest Rate Announcement - March 9, 2016
The Bank of Canada announced this
morning that it is maintaining its overnight rate at 0.5 per cent. In the press
release accompanying the decision, the
Bank noted that inflation is evolving as anticipated but that a weak economy
will continue to dampen growth in consumer prices. Overall, the Bank judges that
risks in the economy are roughly balanced, though financial vulnerabilities have
increased due to falling commodity prices.
With inflation trending close to target while the
economy struggles, the Bank of Canada, whose mandate is to target 2 per cent
inflation over the medium run, has to strike a fairly delicate
balance. Low oil prices continue to vex the Canadian economy
spurring job losses in energy producing provinces while also putting downward
pressure on the exchange rate, which makes the cost of imported goods from heavy
machinery to fresh produce more expensive. We expect that weak economic growth
will continue in the first quarter of 2016, but the possibility of an effective
fiscal stimulus, a stronger US economy and a stabilization of oil prices points
to stronger growth ahead. The door remains open for the Bank of Canada to
reduce rates once more in 2016, though our expectation is that the Bank will
remain on the sidelines throughout the year.