BoC expected to hold key interest rate at 0.5%

OTTAWA – The Bank of Canada is expected to keep its key interest rate on hold Wednesday following a string of better than expected economic data. However, the continued weakness in oil prices and the turmoil on the global markets amid fears about the Chinese economy are expected raise concerns for the central bank, economists say. Benjamin Tal, deputy chief economist at CIBC World Markets, said he’ll be watching to see what the Bank of Canada highlights in its rate announcement. “It will be very interesting to see what the focus is,” Tal said. Oil prices are lower than the Bank of Canada forecast in its July monetary policy report and Chinese economic weakness is expected to hurt commodity prices. So, while the third quarter has been shaping up to show growth, the Canadian economy still faces challenges, Tal noted. “They definitely will talk about the recovery in the third quarter, but I think that they probably won’t be as optimistic about the fourth quarter,” he said. The central bank has cut the rate twice this year, most recently in July when it also downgraded its outlook for the Canadian economy. Since then, Statistics Canada has reported that the economy contracted at an annual pace of 0.5 per cent in the second quarter, in line with the Bank of Canada’s expectations. There has also been better than expected trade results for July and stronger than expected job numbers for August, pointing to an economy that has pulled out of the slump it had been in for the first half of the year. The data adds up to expectations that the Canadian economy will grow in the third quarter after contracting for the first two quarters of the year, putting the country into a recession. However, BMO senior economist Benjamin Reitzes said the volatility in financial markets in recent weeks “is hardly an encouraging sign for global growth.” “The knock-on effect of China’s weakness on emerging markets and the resulting impact on commodity prices will be significant concerns for the Bank of Canada,” Reitzes wrote in a report. “Look for the statement to highlight increased downside risk coming from emerging markets.” Meanwhile, Tal also noted that the Bank of Canada’s core inflation rate has been above the two per cent for 12 straight months. In its last monetary policy report, the central bank attributed it to “transitory effects” including the drop in the loonie compared with the U.S. dollar and some sector specific factors. However, Tal said at some point it will be a concern. “Since then the dollar went down and it might go down even more, especially with the Bank of Canada’s policy relative to the Fed,” Tal said.