Bank of Canada drops economic growth outlook

Maxine SotoOct 20, 2016

At 9:19 a.m. EDT (1319 GMT), the Canadian dollar CAD=D4 was trading at C$1.3084 to the greenback, or 76.43 US cents, stronger than Tuesday's close of C$1.3119, or 76.23 USA cents.

The central bank cut its growth forecast, citing a looming slowdown in housing and a weaker outlook for exports, but said fiscal stimulus, accommodative monetary policy and a strengthening USA economy should help in months ahead.

The Bank of Canada just came much closer to cutting interest rates than anyone would have dreamed before Wednesday's rate announcement. But the bank ultimately kept the rate where it's been since July 2015, as analysts had widely expected.

"If we get lucky" some of this shortfall might not be permanent, Poloz said in the press conference, "but at this stage we can't really predict that". "The downward revision to exports, including spillovers to domestic demand and imports, lowers real GDP by 0.6 per cent by the end of 2018".

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The bank said the recent move by the one-year-old Liberal government to further tighten rules around mortgage lending and housing taxes will cut 0.3 percent from GDP through 2018 by cooling housing sales, but at the same time mitigates the risk that massive household debt levels will wreak havoc on the financial system.

Declining global demand and "a composition of USA growth that appears less favourable to Canadian exports" are pushing export expectations downward. The federal government's new measures to promote stability in Canada's housing market are likely to restrain residential investment while dampening household vulnerabilities.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 0.5%. Visit MarketWatch.com for more information on this news.

Asked about the potential cost of the measures to the economy, Poloz compared it to buying insurance against the possibility of another economic shock or recession.

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The projection implies that the economy will return to full capacity around mid-2018, "materially later than the Bank had anticipated in July".

Despite the downgrades, the bank also offered reassurances that it sees promise ahead.

After a weak first half of the year, the economy is expected to regain momentum through the next two years, but at a slower pace than previously forecast. The reasons for that growth downgrade are what we would have expected.

If Poloz cuts his growth forecast below two per cent for next year, it suggests the economy won't grow quickly enough to eat into slack that has kept inflation within two per cent for nearly two years. In addition, Ottawa's commitment to invest billions in infrastructure will begin having an impact moving forward, the bank said.

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"Sales by Canadian-owned foreign affiliates now exceed total exports from Canada, approaching 30 percent of GDP", the governor said in April. Growth forecasts for the last half of 2016 alone were cut from 2.8% to 1.5%.

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