Bank of Canada leaves key interest rate steady at 0.5% - Action News
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Bank of Canada leaves key interest rate steady at 0.5%

The Bank of Canada today left its benchmark rate unchanged, at 0.5 per cent, saying it is too early to conclude that the economy is on a "sustainable growth path" despite a recent rebound that led it to bump up its 2017 outlook.

Economic growth expected to moderate over remainder of 2017 and over next two years

Stephen Poloz, governor of the Bank of Canada, holds a news conference after the release of the bank's Monetary Policy Report, in Ottawa on Wednesday. (Fred Chartrand/Canadian Press)

The Bank of Canada today left its benchmark rate unchanged, at 0.5 per cent, sayingit is too early to conclude that the economy is on a "sustainable growth path" despite a recentrebound that led it to bump up its 2017 outlook.

"During the rest of this year and into 2018 and 2019, growth in Canada is expected to moderate but remain above potential," the bank said Wednesday.

Economists had widely predicted that the bank would not shift the rate.

In its latest monetary policy report, the bank said Canada's economic growth in recent quarters has been stronger than it forecastin January, but characterized the expansion as "uneven."

The central bank said investment in the oil and gas sector, coupled withstrong consumer demandandresidential investment, were key drives in the better-than-expected economic performance.

"In contrast, non-commodity business investment and exports remain weak, raising questions about the medium-term sustainability of the upturn," the bank said.

Over the course of its current forecast, the bank expects the economy to continue to grow, but at a more moderate pace. The bank now expects real gross domestic product to expand by 2.6 per cent in 2017, up from its January projection of 2.1 per cent, before slowing to 1.9 per cent in 2018 and 1.8 per cent in 2019.

Looking at the first quarter of this year, the bank said oil and gas sector investment and the pace of housing activity are both unlikely to continue at the same rategiven market conditions.

On the topic of housing, the bank singled out the Greater Toronto Area market, saying price growth has sped up "and seems to have entered a phase in which speculation is playing a larger role."

"While there's no fundamental story that we could tell to justify that kind of inflation rate in housing prices, it's that gap between what fundamentals could manage to explain and what is actually happening, which suggests that there's a growing role for speculation in that,"Bank of Canada governor StephenPoloz told reporters in Ottawa.

"In other words, demand is being driven more by speculative demand or investor demand as opposed to just folks that are buying a house."

Timing of possible hike

The timing for potential future interest rate hikes also came into play as the central bank said it now expects the economy to hit full capacity in the first half of next year, a bit earlier than it had forecast in January.

BMO Capital Markets senior economist Benjamin Reitzessaid Canada's central bank remains a long ways from following the U.S. Federal Reserve in boosting rates, but added that an April 2018 hike in Canada looks appropriate.

"If the positive data persist through to July, expect a more positive tonal shift from the [Bank of Canada]then," Reitzes said in a commentary.

"Despite a generally improved forecast,Poloz remains focused on the soft spots in Canadian labour markets and exports, and is not yet ready to declare Canada 'out of the woods' when it comes to unevenness in economic growth," TD senior economist Brian DePratto said in a commentary.

However, DePrattoadded that the "shifting balance of risks around inflation, particularly as we move into 2018 suggest the potential for a 'pulling forward' of the first rate hike."

with files from The Canadian Press