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For Your Information Bank of Canada cuts 2015 growth outlook, holds key rate

Bank of Canada cuts 2015 growth outlook, holds key rate

BARRIE MCKENNA

10:01 EST Wednesday, Apr 15, 2015

OTTAWA — The Canadian economy has stalled and won’t grow at all in the first quarter as the damage from the oil price collapse hits hard and early, the Bank of Canada says.

But the central bank opted Wednesday to keep its key overnight lending rate at 0.75 per cent, insisting that the rest of the year will be much better as lower interest rates filter through the economy and exports rebound.

“The impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger,” the bank said in a statement accompanying the rate announcement. “The ultimate size of this impact will need to be monitored closely.”

The bank said the harsh winter and “temporary weakness” in the U.S. also weighed on Canada’s economy in the first few months of the year.

After that, the “natural sequence” of higher exports, business investment and job growth will “re-emerge,” according to the bank, which stunned investors with a surprise quarter-percentage-point cut in January.

And yet the bank’s latest forecast is filled with fresh warnings – about oil prices, employment, the slowing housing market, sluggish business investment and falling prices for a number of key commodity exports, such as natural gas, lumber, hogs and iron ore.

Bank of Canada Governor Stephen Poloz said recently that the economy would be “atrocious” in the first three months – a view many economists derided as overly gloomy.

The bank now says the Canadian economy will grow 1.9 per cent this year, down from the 2.1-per-cent pace it forecast in January, according to its latest quarterly forecast, released Wednesday. The projection is based on no growth in the first quarter, and annualized rates of 1.8 per cent, 2.8 per cent and 2.5 per cent over the following three quarters as exports, business investment and job creation rebound.

The U.S., by contrast, is expected to grow 2.7 per cent this year The bank has not altered its view that the economy will get back to full capacity “around the end of 2016” – a rough indicator of when it might need to start hiking interest rates.

In its statement, the bank said the “current degree of monetary stimulus remains appropriate.”

Many economists expect the bank to cut its key lending rate again later this year before an eventual return to higher rates sometime in 2016.

There is a “real risk” that the economy actually shrank in the first quarter after “stumbling out of the gate,” Bank of Montreal chief economist Douglas Porter said in a research note.

Mr. Porter said he doesn’t expect the Bank of Canada to cut rates again this year as long as oil prices continue to recover.

But economist David Madani of Capital Economics said it’s “pure fantasy” for the central bank to believe the economy will rebound so quickly in the second half of the year without more interest rate relief.

The bank warned of possible further declines in oil prices, which it said remain “low and volatile” amid continuing global overproduction and rapidly swelling inventories. Brent crude is now selling for roughly $59 (U.S.) per barrel, down from last summer’s peak of $110.

The bank also expects business investment across the country to slump 0.7 per cent this year, compared to the flat spending it had forecast in January. Investment in the energy sector will slump 30 per cent, the bank said.

Part of the problem is that a Canadian dollar at roughly 80 cents (U.S.), while good for exporters, makes it more expensive for companies to buy imported machinery and equipment. The bank estimates that the cheaper dollar is boosting core inflation, which excludes volatile energy prices, by 0.3 to 0.4 per cent.

Indeed, the bank says prices are rising faster than it thought just three months ago, in spite of lower oil prices. It raised its forecasts for both total and core inflation. Core inflation will be at or above its 2-per-cent target throughout the 2015-17 period, the central bank said.

The bank also warned ominously that the “full impact” of the oil price shock has yet to show up in job statistics.

The bank said the impact of the oil price drop will be felt almost entirely in the oil-producing provinces of Alberta, Saskatchewan and Newfoundland. The rest of the country will feel little or no effect.