Bank of Canada maintains overnight rate at 0.5 percent

The Bank of Canada Wednesday announced that it is maintaining its target for the overnight rate at 0.5 percent.

Global economic growth is strengthening and becoming more broadly-based than the bank has expected in its January Monetary Policy Report although there is still considerable uncertainty about the outlook.

The bank expects global GDP growth to increase from 3.05 percent this year to about 3.5 percent in 2018 and 2019.

In Canada, recent data indicate that economic growth has been faster than was expected in its January report.

Growth was temporarily boosted by a resumption of spending in the oil and gas sector and the effects of the Canada Child Benefit on consumer spending.

Meanwhile, residential investment has also been stronger than expected.

Employment data have been robust despite gains in hours worked are still soft and export growth has been uneven in the face of ongoing competitiveness challenges.

Further, business investment remains well below what could be expected at this stage in the recovery while the recent rebound in GDP is encouraging, but it is too early to conclude that the economy is on a sustainable growth path.

During the rest of this year and into 2018 and 2019, growth in Canada is expected to moderate but remain above potential, said the bank.

At the same time, its composition is expected to broaden as the pace of household spending, especially residential investment, slows while the contributions from exports and business investment increase.

The bank now projects real GDP growth of 2.5 percent in 2017 and just below two percent in 2018 and 2019.

However, the bank has revised down its projection of potential growth, reflecting persistently weak investment.

With this combination of a higher profile for economic activity and a lower profile for potential, the output gap is projected to close in the first half of 2018, a bit sooner than the Bank anticipated in January. The country's CPI inflation is now at the two percent target, largely because of the transitory effects of higher oil prices and carbon pricing measures in two provinces, as well as other temporary factors.

The bank's three measures of core inflation, on the other hand, have been drifting down in recent quarters and wage growth remains subdued, consistent with material excess capacity in the economy.

CPI inflation is expected to dip in the months ahead, as the temporary factors unwind, and then return to two per ent later in the projection horizon as the output gap closes.

The bank's governing council acknowledges the strength of recent data, some of which is temporary, and is mindful of the significant uncertainties weighing on the outlook. In this context, the council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 0.5 percent. Endit