Canada's central bank leaves interest rate unchanged, optimistic about economy

The Bank of Canada announced Wednesday that it kept the main interest rate unchanged, but raised its growth outlook for 2016.

It maintained its benchmark rate at 0.5 percent.

Canada's economic prospects are improving because of the federal government's extra spending and a better-than-expected start to 2016, the central bank said in its April Monetary Policy Report.

The bank raised its outlook for Canada's growth to 1.7 percent for this year, up 0.3 percentage point from its previous forecast in January. It attributed the improvement to the positive impact of the March 22 federal budget and recent improvements in manufacturing sales, exports and jobs.

Meanwhile, it also warned that Canada will continue to face headwinds from the oil industry, the slowing U.S. growth and a strengthening Canadian dollar.

Statistics show that prices of oil and other commodities are off their earlier lows and slightly above levels estimated by the bank in January, but remain well below historical averages.

This year's first-quarter GDP growth, however, appears to have been unexpectedly strong. The economy continues to create net new employment, especially in services, despite job losses in resource-intensive regions. In this context, household spending continues to expand moderately.

The bank projects real GDP growth at 1.7 percent this year, 2.3 percent in 2017 and 2.0 percent in 2018.

This new growth profile, combined with the revised estimate for potential, suggests the output gap could close somewhat earlier than the bank anticipated in January, likely in the second half of 2017.

Meanwhile, the country's total CPI inflation is below the 2-percent target and will likely ease further before returning to 2 percent because of a number of favorable factors, including diminishing of the economy's excess capacity. Endit