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BOC holds rate target at 1 percent, cites global headwinds and weak domestic business investment

H.S. Borji
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The Bank of Canada held its target for the overnight rate at 1 percent on Wednesday, as policymakers continued to highlight global economic turbulence and weak domestic business investment.

“Although the outlook remains for stronger momentum in the global economy in 2015 and 2016, the profile is weaker than in July and growth prospects are diverging across regions,” the BOC said in its official rate statement. “Persistent headwinds continue to buffet most economies and growth remains reliant on exceptional policy stimulus.”

The BOC once again noted the strong pickup in exports in recent months, largely a reflection of a stronger US economy and weaker Canadian currency. In this context, the BOC added, “Canada’s exports have begun to respond.”

Canadian exports surged 4.2 percent in the second quarter, after declining in the first three months of the year. In July Canada posted its largest merchandise trade surplus in almost six years, as automobile sales sent export levels to a new record high.

Despite the strong pick up in exports, policymakers were concerned about persistently weak business investment, a sign the BOC will continue to favour accommodative policies over the next year. Business investment is expected to remain weak until “global headwinds recede [and] confidence in the sustainability of domestic and global demand… improve.”

The BOC has been remarkably consistent throughout the global financial crisis, and has held its overnight rate target at 1 percent since September 2010. Canada has relied on extensively on consumer demand to keep its economy elevated in the face of international crises. The BOC commented that consumer spending had shown “renewed vigour.”

However, a closer look at retail sales suggests consumer spending was beginning to wane in the summer, a sign rising debt burdens are beginning to weigh on average Canadians.

Earlier today Statistics Canada said retail sales declined in August for the second consecutive month, falling at the sharpest rate since December 2013. Total retail sales tumbled 0.3 percent to $42.4 billion, as seven of the 11 retail categories accounting for three-quarters of the sector posted declines.

Excluding automobiles, retail receipts were down 0.3 percent, official data showed.

July and August marked the first back-to-back declines in retail sales since 2012.

Policymakers judge that economic growth will average 2.5 percent over the next year, gradually slowing to a 2 percent pace by the end of 2016. That’s around the time the economy is expected to be operating at full capacity, according to BOC estimates.

The International Monetary Fund – a global lending institution representing 188 countries – expects the Canadian economy to expand 2.3 percent this year, leading all other G7 nations except the United Kingdom. Growth is expected to accelerate to 2.4 percent in 2015.

The IMF downgraded its outlook on the global economy this year to 3.3 percent from 3.4 percent, citing “weak and uneven” recoveries in both advanced and emerging economies. The global economy is forecast to grow 3.8 percent next year, down from an earlier estimate of 4 percent.

The Bank of Canada will hold its next and final rate meetings of the year on December 3.

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