The members of the Bank of Canada’s policy committee, like plenty of others, thought they were going to cut interest rates in January. “It is fair to say…that our deliberations began with a bias toward further monetary easing,” Governor Stephen Poloz said in his statement to the press at the end of those deliberations on January 20. Then they thought about it some more. The Governing Council ultimately opted to leave the benchmark interest rate unchanged at 0.5%. The decision suggests that Canada’s central bank thinks it has done all it can to boost the country’s flagging economy at this stage. Faster growth from here is a matter of time and how Prime Minister Justin Trudeau exercises his mandate to run deficits to build infrastructure.
The numbers argued for more stimulus. The international price of oil had dropped an additional US$20 per barrel since the Bank of Canada’s last economic outlook in October. The freefall appears to be at an end, but the time required to rebalance excess supply with weak global demand “will likely take longer than previously anticipated,” the central bank said in its updated Monetary Policy Report. Economic growth likely stalled in the fourth quarter. Therefore, it will take even longer to reach that magical point at which the economy is producing all it can without stirring inflation. The difference between that point and current production—the output gap—likely won’t close until sometime in 2017, according to the Bank of Canada’s new forecast.
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