The Bank of Canada announced this morning that it is maintaining its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that although first quarter GDP growth appears unexpectedly strong, it believes that strength is temporary and will likely reverse in the second quarter. However, fiscal measures announced in the March federal budget are anticipated to have a notable positive impact on growth. The Bank is now forecasting that the economy will grow 1.7 per cent this year, 2.3 per cent next year and 2 per cent in 2018. That upgrade to growth means the output gap will close sooner than expected, likely in the second half of 2017. That suggests a return to the Bank's 2 per cent target for inflation along the same time-line. Overall, the Bank judges risk in the economy as roughly balanced. Interestingly, the Bank did not highlight the housing sector as a risk despite frenzied activity in both Vancouver and Toronto.
A significantly upgraded economic forecast will very likely close the door on further discussion of an impending rate cut, though downside risks in the global economy remain. Indeed, as the economy accelerates and the output gap closes, we expect the Bank to move to a tightening bias. However, the Bank in unlikely to offset the fiscal stimulus provided by the budget and so an increase in interest rates is still some time away. If economic growth and job creation continue to surprise to the upside, it is possible that the Bank will begin raising rates in late 2017 and we could potentially see a modest rise in mortgage rates toward the end of this year in anticipation of tighter monetary policy.
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