Special Reports | Written by ActionForex.com | Oct 22 15 03:48 GMT

The BOC meeting turned out to be more dovish than expected. While leaving the overnight rate at 0.5%, the central bank trimmed its growth forecast for 2016 and 2017, and pushed backward the timing of the economy’s expected return to full capacity to mid-2017. Domestically, the BOC acknowledged that the economy has rebounded as projected in July. However, weakened dynamics in global growth should affect the country’s economic expansion which highly reliant on exports. Canadian dollar plunged more than -1% against US dollar. The loonie had strengthened against greenback over the past 3 weeks.

Policymakers acknowledged that global economic growth has been ‘a little weaker than expected this year’. Yet, they believed that the momentum pointing to a pickup in 2016 and 2017 remains ‘largely intact’. Regarding Canada’s largest trading partner, the US, the central bank noted that US’ economy is expected to ‘continue growing at a solid pace with particular strength in private domestic demand, which is important for Canadian exports’. On China, policymakers admitted that ‘uncertainty about China’s transition to a slower growth path has contributed to further downward pressure on prices for oil and other commodities’. We will discuss in the next paragraph that how the concerns over China have led to BOC’s downgrade of growth outlook.

Domestically, the BOC indicated that the economy ‘has rebounded, as projected in July’. For non-resource sectors, the ‘looked-for signs of strength are more evident, supported by the stimulative effects of previous monetary policy actions and past depreciation of the Canadian dollar’. What concerned policymakers the most is that a persistent decline in commodity prices would result in a downgrade to potential growth at least for the next year or two. As mentioned in the statement, the BOC noted that ‘lower prices for oil and other commodities since the summer have further lowered Canada’s terms of trade and are dampening business investment and exports in the resource sector’. This is the key reason for the central bank to downgrade its growth forecasts for 2016 and 2017. The Bank now projects real GDP will expand +1.1% in 2015, before accelerating to about +2% in 2016 and then +2.5% in 2017. The economy is now expected to return to full capacity, and inflation sustainably to target, around mid-2017.

On inflation, the BOC suggested that ‘total CPI inflation remains near the bottom of the Bank’s target range, owing to declines in consumer energy prices. Core inflation is close to +2% as the transitory effects of the past depreciation of the Canadian dollar are roughly offsetting disinflationary pressures from economic slack, which has increased this year. The Bank judges that the underlying trend in inflation continues to be about 1.5 to 1.7%’.

The BOC currently believes that the global economic slowdown and a rapid moderation in China’s growth might lend external support to Canada’s economic expansion. While the central bank now expects the economy to return to full capacity at around mid-2017, we see the potential for upside surprises after factoring in the planned increase in infrastructural spending by the newly election Liberal government.