The Bank of Canada kept its interest rate unchanged at 1.75 percent Wednesday as the sharp decline in oil prices temporarily dims Canada's economic outlook for the coming months.
The bank has raised its key rate five times since the summer of 2017 to keep inflation in an acceptable range, typically between 1 percent and 3 percent annually. It last raised its rate in October and kept at 1.75 percent in December, and then again today.
The bank projects Canada's economic growth to be 1.7 percent in 2019, down from its October forecast of 2.1 percent.
However, it is optimistic that the economy will begin to strengthen again as early as the second quarter of this year.
It said in the announcement that the drop in global oil prices has a material impact on the Canadian outlook, resulting in less trade and national income.
The bank estimated the oil slump, which began last summer and has seen prices recover in recent weeks, will reduce the level of Canada's gross domestic product by 0.5 percent by the end of 2020.
It said investment in Canada's oil and gas sector will fall 12 percent this year. The industry now accounts for roughly 15 percent of business investment in Canada, down from 30 percent in 2014, reflecting the cancellation and postponement of numerous projects in the western Canadian oil sands.
"Looking ahead, exports and non-energy investment are projected to grow solidly... Indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1 percent in 2020," it said.
The timing of its next rate increase will depend on several factors, the bank said, and there will be a particular focus on developments in the oil markets, the Canadian housing sector and global trade policy.
It said it will no longer need to raise the rate once it reaches a "neutral" level of between 2.5 percent and 3.5 percent.
Inflation is expected to dip temporarily below the central bank's guiding 2 percent target for much of this year, largely because of the effect of lower energy prices.
The bank expects inflation to be back to near target by the third quarter of this year.
It also cautioned that its forecast is subject to "several upside and downside risks," which are now roughly balanced.
Latest comments