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Alexander Chute Economist
Tel: 902-424-5810Email: Alexander.Chute@novascotia.ca

October 25, 2017
BANK OF CANADA MONETARY POLICY

The Bank of Canada maintained the overnight rate at 1.0 per cent. The Bank Rate is correspondingly 1.25 per cent and the deposit rate is 0.75 per cent.

Global Growth

The global economy continues a broadening expansion. The US economy rebounded in the second quarter and euro area growth has firmed. Emerging-market economies are showing signs of improvement. However, inflation remains below target in most advanced economies reflecting past excess capacity and weak wage growth.

 

Chart Source: Bank of Canada

The US economy is projected to expand at a moderate pace after a rebound in Q2 with economic fundamentals consistent with projected GDP growth of about 2 per cent on average over 2017 to 2019. Consumption growth is expected to continue with support of strong labour market. The Bank of Canada base-case projection do not incorporate new fiscal or trade measures that may occur.

Euro Area growth has been stronger than expected and broad-based across member countries. Japan's economic activity was strong in Q2 driven by public investment and consumption. Growth in China was stronger than anticipated in Q3, but is expect to soften with previous policy measures for housing and financial sector. Financial stability remains a risk as total credit continues to expand in China.

Oil prices have increased slightly since July with stronger-than-expected US demand over the summer, declines in inventories, and stable rig counts. The prices of some non-energy commodities have increased. Base metal prices have risen with global demand. Lumber prices have increased due to wildfires in British Columbia and potential supply disruptions caused by hurricanes in US. Agriculture prices have declined from seasonal changes and expectations of stronger global crop yields.

 

Chart Source: Bank of Canada

 

Canada Growth Outlook

The Bank of Canada expects Canada's GDP to grow by 3.1 per cent in 2017 (up from 2.8 per cent in July), 2.1 per cent in 2018 (up from 2.0 per cent in July) and 1.5 per cent in 2019 (down from 1.6 per cent in July). The output gap is estimate to be between -0.5 and 0.5 per cent in Q3.

Growth over the first half of 2017 has been robust with exceptional strength in consumption due to favorable financial conditions and rising employment and income. Business investment and energy exports have also contributed to growth. Growth is expected to moderate in the second half of year but still be at a 2 per cent annual pace.

The Bank of Canada projects that economic growth will slow and be close to potential growth over 2018-19. Composition of growth will remain relatively balance. Consumption and residential investment are projected to moderate in response to less-accommodative financial condition and housing policy measures. Government spending will boost growth.  Business investment will grow at a steady pace with economy operating close to capacity, household and foreign demand, solid profit margins and confidence all supporting growth. Exports are projected to grow in line with strengthening foreign demand.

Chart Source: Bank of Canada

Chart Source: Bank of Canada

 

 Inflation Outlook

Inflation has increased, rising form 1 per cent in June to 1.6 per cent in September, partially reflecting gasoline prices as Hurricane Harvey disrupted refining capacity. The fading effects of weak food inflation and economic slack are also contributing to rising inflation. The recent appreciation of the Canadian dollar is estimated to reduce projected inflation. CPI inflation is anticipated to average 1.4 per cent in Q4 before moving up to around 2 per cent in the second half of 2018.

 

Chart Source: Bank of Canada

 

 

The next scheduled date for announcing the overnight rate target is December 6, 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on January 6, 2018.  

Bank of Canada Press Release, Monetary Policy Report.



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