The updated Monetary Policy Report (MPR) paints a significantly more pessimistic picture of near-term economic developments but leaves broadly intact the longer-term view of economic recovery.
The major change since January concerns the estimated impact of the slump in oil prices. To this end first quarter GDP growth is now put at only zero, down from the 1.5 percent (saar) call made in January. However, second quarter growth has been revised up from 1.5 percent to 1.8 percent and the third quarter rate from 2.0 percent to 2.8 percent. As a result, full year growth in 2015 has been shaved just 0.2 percentage points to 1.9 percent while 2016 has been revised up a tick to 2.4 percent. The output gap actually closes somewhat earlier but inflationary pressures thereafter remain largely stable. In fact core inflation is projected at 2.0-2.1 percent over the entire forecast horizon.
The bottom line is that the negative effects of the oil price slump are now expected to be significantly more marked at the start of the year but, by the same token, the subsequent recovery is seen that much more robust.
BoC policy would appear to be on hold for now but such an call assumes that the new economic forecasts are broadly accurate. Accordingly, surprising weakness in the second quarter economic data could have a disproportionately large impact upon market sentiment.
The Monetary Policy Report is a quarterly report of the Bank of Canada's Governing Council. It presents the Bank's base-case projection for inflation and growth in the Canadian economy, and its assessment of risks. In July, 2009, the BoC began publishing four quarterly reports. This enables the Bank to provide the full context surrounding its views on the economy each quarter and provides a more consistent format for the publication.
Each quarter, the MPR gives the financial markets a view of the BoC's governing council thinking. This provides important guidance especially since the BoC does not publish minutes from its policy setting meetings. The report is released at the same time as the policy announcement is made.
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