Today, the Bank of Canada has kept its interest rate overnight at 1 ¾ percent. The interest rate for the bank is 2%, the interest rate for deposits is 1½%.
The global economic expansion is still slowing down, with a growth forecast that will slow down to 3.4 percent in 2019 from 3.7 percent in 2018. In particular, growth in the United States remains strong, but is expected to be slower by 2019 . there are increasing signs that a US-China trade conflict is burdening global demand and commodity prices.
World reference oil prices were about 25 percent lower than projected in October Monetary Policy Report (MPR). Lower prices reflect, in particular, a steady increase in oil supply in the US and lately increased concerns about global demand. These concerns among market participants have also been reflected in bond and equity markets.
The fall in world oil prices has a significant impact on forecasts in Canada, which results in lower trade conditions and national income. Transport restrictions and rising production also merged to increase oil supplies in the west and further push down Canadian reference prices. While the price differentials in recent weeks have been decreasing after the forecast of a compulsory reduction in production in Alberta, investment in the Canadian oil sector is expected to continue to deteriorate.
These events occur within the Canadian economy, which generally works well. Growth is close to potential, employment growth was strong, and unemployment is at a 40-year low. In the upcoming period, exports and non-energy investments are expected to grow steadily, supported by external demand, CUSMA, lower Canadian dollars and federal tax-oriented investment measures.
Meanwhile, spending on consumption and housing investment was weaker than expected, as housing markets are adapting to municipal and provincial measures, changes in mortgage policies and higher interest rates. Household consumption will further undermine slow growth in oil producing regions. The Bank will continue to monitor these adjustments.
The Bank estimates that real GDP will increase by 1.7 percent in 2019, which is 0.4 percentage points more slowly than in October. This revised forecast reflects a temporary slowdown in the fourth quarter of 2018 and the first quarter of 2019. This will open up modest overcapacity, particularly in oil producing regions. Nonetheless, demand indicators are beginning to show a new impetus in the beginning of 2019, which led to growth above the potential of 2.1% in 2020.
Core inflation measures remain almost 2%. Consumption inflation, according to the consumer price index, is expected to fall to 1.7% in November due to lower petrol prices. Inflation according to the consumer price index is expected to continue to fall and will be lower than 2% in the greater part of 2019, mainly due to lower gas prices. On the other hand, the lower level of the Canadian dollar will affect inflation. As these transient effects take place and excess capacity is absorbed, inflation will return to about 2% by the end of 2019.
The Governing Council still considers all these factors and estimates that the political interest rate will eventually have to be lifted to a neutral zone in order to achieve the inflation target. The appropriate rate of price growth will depend on how the outlook will evolve, with a particular focus on the development of oil markets, the Canadian housing market and global trade policy.
The next date for the announcement of the overnight goal is March 6, 2019. The next full update of the bank's forecasts for the economy and inflation, including projections risks, will be published in the MPR on 24 April 2019.