Friday, April 17, 2015

Bank of Canada leaves overnight interest rate at 0.75 per cent

The Bank of Canada announced that it will be maintaining the overnight interest rate at a low 0.75. The bank rate will be one per cent and the rate on deposits 0.50 per cent.
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Total Consumer Price Index(CPI), according to the Bank, rose just one percent even though core inflation has remained near 2 percent for the last few months. The lower CPI rate is the result of the sharp drop in energy prices. The drop in the value of the dollar, increasing the cost of U.S. imports, has offset other factors that might reduce prices.
During the first quarter of this year, the Canadian economy has stopped growing due to damage caused by the decline in oil prices and its negative effect on the oil production sector.The Bank statement said:“The impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger. The ultimate size of this impact will need to be monitored closely.” The Bank predicts that the remaining quarters will see a rebound due to low interest rates, and the positive effect that lower dollar will have on exports. While the lower dollar helps exporters in that their products may be cheaper in countries such as the US, the higher prices for imported machines and materials used in production may partially offset these gains in some cases. The Bank has decided not to lower interest rates further as it did in January this year.
Stephen Poloz, the Bank of Canada Governor said: "By the middle of the year we should be seeing only the good stuff." However the statement also contained a number of warnings about the road ahead including the slow pace of business investment, and falling prices for Canadian commodity exports including oil, natural gas, lumber, hogs and iron ore.
For the entire year, the Bank predicts a growth rate of 1.9 per cent, down from the forecast of 2.1 per cent predicted in January. After no growth this quarter, the growth rate will be 1.8 per cent, 2.8 per cent and 2.5 per cent over the following three quarters on an annualized basis. Given the relatively slow growth rate, many economists expect that the Bank could very well cut rates again before raising them next year. Economist, David Madani, of Capital Economics insisted that it was "pure fantasy" if the Bank believes that economy will rebound as quickly as it predicts unless there is even more interest rate relief. However, the Bank sees the current rates as appropriate at least for now. If growth remains relatively sluggish Poloz may decide to lower rates once again as some predict. The Canadian dollar reacted positively to the Poloz announcement, increasing in value relative to the US dollar.

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