Bank Of Canada Forethoughtful While Country Is Blooming?

As uncertainties continue to becloud the economy’s stronger-than-expected start to the year, the Bank of Canada held its cutting-edge rate of 0.5 per cent today.

Since the fall of oil prices in 2014, Canada’s economy hasn’t looked so healthy. It’s evident in gross domestic product data, job growth, retail sales and even the much maligned manufacturing sector.

So, if things are so rosy in Canada, why are investors so down on the country’s perspective?

Following are the latest developments in the Canadian economy and the key issues informing policy makers after the Bank of Canada Governor Stephen Poloz making a rate decision today.

State of Play

The two reasons why Canada’s economy is doing better are: firstly, the rebound of oil prices from last year’s lows, which is giving energy-producing regions some dash; and secondly, a housing boom in Vancouver and Toronto is fueling construction and creating billions in new found wealth for the city’s citizens.

Here’s the data

The projecting output from the Bank of Canada at a pace per annum of 3.8 per cent in the first quarter of this year, building off a 3.2 per cent growth in the second half of last year. These are exhilarating levels of growth that are at the very high end of what Canada’s economy has been able to hit in the past 15 years. The recent employment picture has been strong. There’s been an increase in the number of jobs to 277000. Other positive signs include hours worked numbers that show gains of 1.1 per cent over the past 12 months and an employment rate at 6.5 per cent, which is the lowest since recession. All this causes an increase in Canadian household’s expenditures.

Plenty of Buts

The Canadian dollar is only one of two major currencies that have declined against the U.S. dollar this year. The only country Canada has outplayed is Brazil, which is in the middle of a political crisis.

People are taking their hint from the Bank of Canada as policy makers have been drawing attention to the risks and weakness of the economy for months, even as data are improving, and downplayed changes of higher interest rates even as borrowing costs increase in the U.s.

One reason why the Canadian dollar has been weak is because interest rate differentials matter for currencies and with the U.S. central bank in the middle of a rate increase cycle, and rates flat in Canada, investors has found the Canadian dollar less attractive.

Rate Rationale

Given Canada’s economy has currently distanced the U.S., the central bank’s reluctance to raise rates and its analysis has raised some eyebrows.

Poloz has been arguing that despite the recent acceleration in growth, Canada is still playing catch up to the U.S. economy. Canada’s march to full capacity was delayed by the oil price decline, he argues, so it makes sense that growth will pick up and exceed the rate of U.S. expansion. But that doesn’t diminish the need for lower rates.


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