OTTAWA, July 13 (Reuters) – The Bank of Canada cut its growth forecast for 2016 but held rates steady on Wednesday, saying exports continued to disappoint and acknowledging it may have underestimated structural challenges facing businesses.
In explaining its decision to leave interest rates unchanged even as it cut its expectations for Canadian and global growth, the central bank reiterated warnings about possible speculation in the housing markets in Toronto and Vancouver.
Galloping price appreciation in Canada’s two largest housing markets and a series of disappointments in export strength highlight the difficulty policymakers face in stimulating slow parts of the economy without unintentionally fueling near-record levels of household debt.
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As expected, the bank held its overnight rate at 0.5 percent, where it has been since last July, even as it trimmed its 2016 gross domestic product (GDP) forecast to 1.3 percent from 1.7 percent in April, saying it expected a bounceback in the third quarter and beyond. The Canadian dollar rose to its strongest level since July 7.
“The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty,” the bank said in a statement.
Addressing the serial disappointment of Canada’s non-energy export sector, which had been expected to pick up the slack from slumping commodities, the bank cited “an unexpected but temporary” slowdown in U.S. investment but insisted non-resource investment would dominate by year-end even with structural challenges.
“My sense is that maybe they are still a bit too optimistic about the export sector. That, for me, is a big concern for the Canadian economy over the balance of this year,” said Shaun Osborne, chief currency strategist at Scotiabank.
The bank said the response of exports to past weakening in the Canadian dollar might take longer than expected simply because some industry had disappeared.
“The prolonged period of disappointing global growth and weak demand for Canadian exports caused some firms to exit and a permanent loss of capacity,” the bank said in its quarterly monetary policy report.
It said the shutdown of oil sands production facilities and the evacuation of residents during the Fort McMurray wildfires in May and June cut about 1.1 percentage points from annualized GDP in the second quarter. The restoration of oil production and rebuilding efforts will boost annualized growth by 1.3 percentage points in the third quarter, it projected.
The bank also said Britain’s vote to leave the European Union was likely to cut global GDP growth by 0.2 percent and Canadian GDP by 0.1 percent by the end of 2018.
