The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 1 per cent. In its accompanying statement, the Bank noted that total CPI inflation has reached its 2 per cent target sooner than the Bank had forecast due to higher energy prices and a lower Canadian dollar. On economic growth, the Bank expects an improvement in exports in the second half of the year as well as strengthening business investment and a soft landing in the housing market. The Bank judges that the balance of risk in the Canadian economy is weighted modestly to downside risk to inflation.
Inflation in Canada has started to move materially higher in recent months, driven by a substantial increase in energy costs. At the same time, the Canadian economy has posted disappointing growth due to slowing household spending and a drag on exports from weakness in the United States. However, as the Bank noted in its statement, there are good reasons to believe that both of these trends will prove temporary. Much of first quarter economic weakness was due to unusually severe winter weather which kept consumers at home and construction projects delayed. As the weather warms up, we anticipate a rebound in growth in the second quarter. As for inflation, the impact of higher energy prices on headline CPI should fade in coming months and the Bank has already suggested it will look past the transitory increase in inflation. However, there does seem to be some underlying momentum in core CPI, which if sustained will be much harder for the Bank to ignore. For now, we anticipate the Bank will remain in neutral, leaving rates unchanged until 2015.