Bank of Canada Cuts Economic Outlook

The Bank of Canada continued to hold the line on interest rates despite the recent acceleration in inflation, but adjusted its inflation outlook Wednesday to acknowledge the faster-than-expected rise in Canadian consumer prices.

The central bank also said it expects Canada’s economy to return to full capacity a bit later than previously projected.

The Canadian dollar dipped immediately after Governor Stephen Poloz and his colleagues released their statement.

In its regularly scheduled interest-rate policy statement, the central bank, as expected, left its key policy interest rate unchanged at 1 per cent, where it has held steady for nearly four years.

But in its quarterly Monetary Policy Report, released at the same time, the bank raised its consumer price index inflation projection to 2.1 per cent for the just-ended second quarter and 2 per cent for the third quarter, from an earlier forecast of 1.6 per cent and 1.8 per.

It also raised estimates for its so-called “core” inflation measure – which excludes some of the most volatile components of the CPI, and is considered a better gauge of underlying inflation pressures in the broad economy – to 1.6 per cent in the second quarter and 1.7 per cent in the third quarter, from 1.2 per cent and 1.4 per cent, respectively, in the April report.

Nevertheless, slightly slower-than-expected economic growth has prompted the central bank to move back its expectation for when that core measure will reach 2 per cent – the inflation target the bank relies on as its guide for setting interest rates. It now projects the core measure will stabilize at 2 per cent third quarter of 2016, rather than its previous call of the 2016 first quarter.

David Parkinson @ The Globe & Mail

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