The BoC's updated Monetary Policy Report (MPR) recognises what looks to have been a significantly stronger than previously anticipated pick-up in growth last quarter. Although the strength is in part seen as attributable to temporary factors, the near-term outlook has been revised positively and the economy in 2016 as a whole is seen expanding more rapidly than anticipated in January.
First quarter economic growth is now estimated at 2.8 percent (saar), up some 1.8 percentage points from the previous forecast. The second quarter has been marked down from 2.2 percent to 1.0 percent (before rebounding to 2.2 percent in Q3) but this still leaves a usefully more buoyant first half. Final domestic demand growth is expected be 0.9 percent and 2.3 percent in 2016 and 2017 respectively versus comparable rates of 0.8 percent and 1.9 percent in January.
Nonetheless, with business investment still shrinking due to sharp declines in the energy sector, the BoC has reduced its estimate of productive potential. Combined with the new growth profile, this means that the output gap is expected to close in the second half of 2017, slightly more quickly than previously assumed previously.
Even so, the new inflation outlook is little different from last time and a headline annual rate of 2.0 percent (the target mid-point) in Q4 2017 is just a tick higher than last time. The same applies to core inflation which is similarly put just 0.1 percentage points firmer at also 2.0 percent.
Overall then the April MPR is predictably more upbeat than its January edition but it still suggests that the BoC should be in no hurry to move on interest rates, in either direction. If the revised forecasts are anything like accurate the eventual policy shift will be a tightening. However, for now, at least some downside risk to rates must remain in case the second quarter economy disappoints.
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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