OTTAWA—Canada's central bank kept its benchmark
interest rate at 0.75% on Wednesday and said its outlook for a
return to growth starting midyear is largely unchanged, even as
concerns emerge about momentum in the U.S. economy.
Domestic consumption has held up relatively well amid lower
prices for crude oil, the country's top export, the Bank of Canada
said in its latest policy statement. Despite a broad-based rise in
global bond yields, financial conditions for households and firms
remain highly stimulative, it added.
"While a weak first quarter in the United States has raised
questions about that economy's underlying strength, the bank
expects a return to solid growth in the second quarter," it said.
"This will help advance the rotation of demand in Canada toward
more exports and business investment."
The U.S. takes up some three-quarters of Canadian goods shipped
abroad, and the central bank is counting on an increase in
nonenergy exports to power growth. However, the U.S. economy grew
at a slow pace in the first quarter amid soft business investment
and consumer caution.
Douglas Porter, chief economist at BMO Capital Markets, said the
statement suggests "a shadow of doubt" about the U.S. economy has
"clearly crossed the central bank's forecast." He said BMO is
sticking to its view that Canadian interest rates will be on hold
until the second half of next year.
The Bank of Canada's decision to stand pat was widely expected,
but economists are divided over its next likely move. Half of the
10 economists at primary Canadian government securities dealers
surveyed recently by The Wall Street Journal anticipated no change
in the benchmark rate until the end of June 2016. However, two
economists predicted the bank would raise rates by that time, while
three expected lower rates.
The central bank surprised markets with a
quarter-percentage-point rate cut to 0.75% on Jan. 21, a move meant
as "insurance" against the potential impact of the sharp drop in
oil prices. Canada is a net oil exporter and lower oil prices have
spurred many large oil producers to cut back planned investment.
The Bank of Canada has said the Canadian economy didn't grow at all
in the first quarter of this year. Statistics Canada will release
gross domestic product data for that period on Friday.
In recent comments, Bank of Canada Gov. Stephen Poloz indicated
the January rate cut appeared to be working in terms of easing
financial conditions. He predicted Canada's GDP would rebound in
the second half, after absorbing most of the negative impact of
lower oil prices early in 2015. The rebound would be supported by a
robust U.S. economy, a gain in nonenergy exports and accommodative
financial conditions, he signaled.
The central bank has projected growth of 1.9% for all of 2015
and 2.5% for next year.
Wednesday's policy statement said the bank estimates that the
underlying trend of inflation is 1.6% to 1.8%, "consistent with
persistent slack in the economy."
The bank also noted recent gains in the Canadian dollar versus
its U.S. counterpart, in the context of a rebound in crude prices,
and a ramp-up in global bond yields. "If these developments are
sustained," the Bank of Canada said, "their net effect will need to
be assessed as more date become available."
The Canadian dollar hit a four-month high in mid-May but has
since weakened sharply. It is currently worth about 80.4 U.S.
cents.
Write to Paul Vieira at paul.vieira@wsj.com
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