As expected, the Bank of Canada kept its reference rate unchanged at 0.5 percent today. While acknowledging that GDP growth in the first half of 2016 was lower than expected, reflecting both the Alberta forest fires an a disappointing export performance, the Bank is expecting a solid rebound in the second half of the year, resulting in "above potential" GDP growth.
The Bank's optimism reflects several factors, including a continuing recovery in oil output, rebuilding efforts in Alberta and a boost to consumption resulting from improved child benefit payments. Exports may continue to be a drag on growth, but the Bank expects the Federal infrastructure spending spree to start having a measurable effect later in the year. No doubt it is a source of relief to the Bank that the burden of getting the economy moving again no longer falls solely on monetary policy.
As ever, the Bank's press release throws in a couple of caveats at the end. While its concern over the Vancouver housing market seems to have eased somewhat, thanks to a new tax on foreign buyers, the Bank notes that "financial vulnerabilities associated with household imbalances remain elevated". As if to illustrate the point, a survey released today shows that almost half of Canadian households live quite literally from paycheck to paycheck. Almost 40 percent say they are "overwhelmed" by their debt. And this is with mortgage rates stable at 3 percent or lower! The Bank must be terrified at the thought of what is likely to happen when the time finally arrives for it to start raising interest rates.
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