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Bank of Canada expected to Keep its Key Interest Rate at 1% next Tuesday

Economists expect the Bank of Canada to keep its key interest rate at 1 per cent next Tuesday, June 5, but they are less sure about what commentary the central bank will use in its policy statement.

 

David Madani, Canada economist for Capital Economics, expects that the Bank will be more negative about global economic growth, and the challenges it presents to Canada, than it was in its previous statement.

 

Officials are probably already regretting raising the possibility of an eventual withdrawal of policy stimulus in the last statement released only six weeks ago. We doubt that rate hike hint will be dropped from next week’s statement, but the language could be softened,” he wrote in a report.

 

The Bank of Canada isn’t due to update its economic forecast until July 18. It had estimated first-quarter GDP expansion of 2.5 per cent on an annualized basis. But Mr. Madani expects the call was too optimistic and the actual number will come in closer to 1.5 per cent.

 

Temporary disruptions in the natural resources sector likely dragged on results and the pace of expansion should pick up, reaching 2.5 per cent in the current quarter, he added.

 

However, several factors will likely force the central bank to refrain from boosting rates any time soon. Economic growth in the second half of the year is likely to measure only about 1.5 per cent and inflation appears contained within the Bank of Canada’s target range of between 1 per cent and 3 per cent, Mr. Madani said.

 

And then there’s the strength of the Canadian currency to consider. He writes:

“We still think that the Canadian dollar is over-valued. With the U.S. Federal Reserve likely to keep its policy interest rate on hold until at least 2014, this is another reason why we think the Bank of Canada’s best option is to continue its wait and see approach, particularly given Europe’s mess, softer U.S. data and Canada’s overheated housing market.”

 

http://www.theglobeandmail.com

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