The Bank of Canada today maintained its target for overnight rate of 1%. The bank rate is correspondingly 2% and the deposit rate is 1% and a half.
Global economic expansion remains subdued, with a forecast for deceleration to 3.8 percent in 2019 from 3.7 percent in 2018. In particular, growth in the United States remains solid, but is expected to slow to a more sustainable pace by 2019. There are growing signs that the US-China trade dispute is weighing on global demand and commodity prices.
Global reference prices for oil were around 25% lower Monetary policy report (MPR). Lower prices mainly reflect sustained increases in US oil supply and, more recently, concerns about global demand have increased. These concerns among market participants were also reflected in the bond and stock markets.
The drop in global oil prices has a significant impact on the Canadian outlook, resulting in lower terms of trade and national income. In addition, transportation restrictions and increased production combined to increase oil stocks in the West and exert further pressure on Canadian reference prices. While price differentials have narrowed in recent weeks after the mandatory production cuts announced in Alberta, investment in Canada's oil sector is expected to weaken further.
These developments are occurring in the context of a Canadian economy that performs well overall. Growth has been close to potential, employment growth has been strong and unemployment is at least 40 years old. Looking ahead, exports and non-energy investments are projected to grow solidly, supported by external demand, by CUSMA, by the low Canadian dollar and by federal investment-related fiscal measures.
Meanwhile, consumer spending and housing investment were weaker than expected as housing markets adjust to municipal and provincial measures, changes in mortgage guidelines, and high interest rates. Household spending will be further subdued by slow growth in oil-producing provinces. The Bank will continue to monitor these adjustments.
The Bank projects that real GDP will grow by 1.7% in 2019, 0.4 percentage point lower than the October outlook. This revised forecast reflects a temporary deceleration in the fourth quarter of 2018 and in the first quarter of 2019. This will open up a small amount of surplus capacity, especially in oil-producing regions. However, demand indicators are expected to begin to show new momentum in early 2019, leading to growth above the potential of 2.1% in 2020.
Core inflation measures remain grouped close to 2 percent. As expected, CPI inflation declined to 1.7% in November due to lower gasoline prices. Inflation as measured by the CPI is projected to remain even lower and to be below 2% during most of 2019, mainly due to lower gasoline prices. On the other hand, the lower level of the Canadian dollar will exert some upward pressure on inflation. As these transitional effects unfold and overcapacity is absorbed, inflation will return around the 2% target by the end of 2019.
Weighing all these factors, the Governing Council continues to judge that the policy interest rate will have to rise over time to a neutral range to reach the inflation target. The appropriate pace of rate increases will depend on how the perspective evolves, with particular focus on developments in the oil markets, the Canadian real estate market and global trade policy.
The next scheduled date to announce the overnight rate target is March 6, 2019. The next full update of the World Bank's economic and inflation outlook, including projection risks, will be published in the MPR on April 24, 2019 .