The July Monetary Policy Report (MPR) acknowledges a surprisingly large dent to economic growth caused by the oil price collapse. Its effects have proved more durable than the front-end loaded impact previously anticipated and, accordingly, near-term prospects are now viewed much more cautiously than in April. If accurate, the less optimistic assessment would certainly justify today's 25 basis point cut in key interest rates (see calendar entry).
Real GDP is now expected to have contracted 0.5 percent (saar) in the second quarter (versus April's call of up 1.8 percent) which, if correct, would put Canada in technical recession. Moreover, the third quarter's rise in total output has been reduced from 2.8 percent to only 1.5 percent. As a result, calendar year growth in 2015 as been marked down from 1.9 percent to just 1.0 percent (but remains unchanged at 2.5 percent in 2016).
As a result, full capacity is not expected to be reached until the first half of 2017, comfortably later than thought probable last time. In turn this has prompted a downward adjustment to the projected inflation profile which now puts both headline and (from Q2 2016) core CPI inflation below 2 percent until the second quarter of 2017.
In summary, the July MPR is a good deal less optimistic than its April counterpart and probably soft enough to ensure that financial markets will contemplate even another monetary ease before year end.
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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