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The Bank of Canada kept its key interest rate unchanged and said a weaker currency and household spending are leading a recovery from the shock of lower oil prices.
Policy makers kept the benchmark rate on overnight loans between commercial banks at 0.5 per cent, in a decision released Wednesday in Ottawa, after cutting it twice this year in January and July. Twenty-three of 24 economists predicted no move, and one called for a quarter-point cut.
After Canada’s economy contracted in the first two quarters of this year, meeting the textbook definition of a technical recession, evidence the worst is over has started trickling in for the Group of Seven’s biggest oil exporter. Signs of recovery include the biggest two-month gain in exports since 2011 and creation of 193,300 jobs in the 12 months through August, defying the normal pattern of a recession.
“Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States,” policy makers led by Governor Stephen Poloz said in a statement. “Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy,” adjustments it expects will take “considerable time.”
The decision will be parsed by political leaders amid a tight election campaign focused on the economy. Prime Minister Stephen Harper has said the economy “is back on track” and credited his move to balanced budgets. Tom Mulcair’s leftist New Democrats and Justin Trudeau’s centrist Liberals, who polls suggest could defeat the incumbent Conservatives in the Oct. 19 election, are attacking Harper’s economic stewardship.
Canada’s lower dollar is helping the world’s 11th largest economy adjust to the drop in commodity prices, and to more recent questions about the global economy linked to signs of slower growth in China, the central bank said. “While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum.”
The Canadian dollar fell to the lowest since 2004 last month and was near that mark Tuesday at about $1.32 per U.S. dollar. That comes as the economy in the U.S. – which buys three-quarters of Canada’s exports – is strengthening enough for Federal Reserve officials to signal they will raise interest rates for the first time since 2006.
The bank said Wednesday that economic growth and inflation appear to moving in line with its July forecast. At that time policy makers called for 1.5 per cent annualized growth in the third quarter.
Important drags remain on Canada’s recovery. Oil prices fell below $40 a barrel last month, consumer spending may be limited by high debt loads, some governments are curbing spending and exports have suffered from years of weak global demand.
The Bank of Canada said Wednesday that “risks to financial stability are evolving as expected.” Policy makers have said the biggest such risk relates to surges in the housing market and consumer debt.
“Taking all of these developments into consideration, the Bank judges that the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate,” the bank said.