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Bank of Canada holds rates steady, cuts growth forecast

Bank of Canada holds rates steady, cuts growth forecast

OTTAWA: The Bank of Canada cut its growth forecast on Wednesday as disappointing exports and global uncertainties dampened demand, and warned that while it expected business investment to rise, it may have underestimated structural challenges facing industry.

As expected, the bank held its overnight rate at 0.5 percent, where it has been since last July, even as it trimmed economic growth forecasts for Canada and the world, saying it expected a bounceback in the third quarter and beyond.

“The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty,” the bank said in a statement.

In explaining its decision to hold rates steady even as it cut its 2016 GDP forecast to 1.3 percent from 1.7 percent in April, the central bank said it expected a boost to the economy from higher consumer spending and the resumption of oil production and rebuilding after the Fort McMurray wildfires.

It also repeated a June warning about possible speculation in the housing market in Vancouver and Toronto, highlighting the difficulty policymakers face in stimulating slow parts of the economy without unintentionally fueling already high levels of household debt.

It said financial vulnerabilities are “elevated and rising,” particularly in those two cities.

Addressing the serial disappointment of Canada’s non-energy export sector, which had been expected to pick up the slack from slumping commodities, the bank cited “an unexpected but temporary” slowdown in US investment but insisted non-resource investment would dominate by year-end even with structural challenges.

Still, it said the response of exports to past weakening in the Canadian dollar might take longer than expected simply because some industry had disappeared.

“The prolonged period of disappointing global growth and weak demand for Canadian exports caused some firms to exit and a permanent loss of capacity,” the bank said in its quarterly monetary policy report.

It said the shutdown of oil sands production facilities and the evacuation of residents during the Fort McMurray wildfires in May and June cut about 1.1 percentage points from annualized GDP in the second quarter. The restoration of oil production and rebuilding efforts will boost annualized growth by 1.3 percentage points in the third quarter, it projected.

The bank also said Britain’s vote to leave the European Union was likely to cut global GDP growth by 0.2 percent and Canadian GDP by 0.1 percent by the end of 2018.

Copyright Reuters, 2016

Courtesy : BRecorder



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