Much of the impetus for the Bank of Canada’s announcement to retain its interest rates on Wednesday (April 13) lies with the federal administration’s recently provided fiscal stimulus, according to Governor Stephen Poloz.
In a reversal from January’s monetary policy report, when Poloz stated a preference for lowering rates, the Bank of Canada decided to keep rates flat amid weaker prospects for global growth in energy and net exports.
“The shocks that we’ve introduced in this forecast were primarily negative shocks. So there is no doubt in my mind that we would have at least had that same bias going into the discussion,” Poloz told media after the rate announcement, as quoted by Bloomberg
The benchmark overnight rate remained at 0.5 per cent, the same level it has been after two cuts in 2015. Officials maintained that activity in the Canadian economy is still primarily fuelled by new government spending and fiscal measures that are taking a significant load off the BoC’s back.
Poloz advised caution in interpreting the 2.8 per cent annualized growth rate during the first quarter of the year, saying that it does not necessarily indicate that the national economy—which has suffered from the impact of long-declining global oil prices—would experience a smoother road from here on.
“Some of this strength represents a catch-up after temporary weakness in the fourth quarter, and some of it reflects temporary factors that will unwind in the second quarter,” the BoC Governor said.
The Bank’s latest projections are expecting a 0.8 per cent slowdown in Canada’s GDP growth this year, and investments in the energy sector will fall by a sharp 60 per cent compared to 2014 levels.
Poloz assured that these developments don’t imply that full recovery is already out of the question, though.
“It does appear that the positive forces at work in the economy are starting to outweigh those that are negative,” Poloz assured, pointing at the Bank’s predictions of government spending stimulating an additional 0.5 per cent growth in 2016 and 0.6 per cent in 2017.