The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 0.75 per cent. In the press release accompanying the decision, the Bank noted that inflation in Canada continues to evolve as forecast with core inflation boosted by a lower dollar while CPI inflation remains near the bottom of the Bank's 1-3 per cent control range due to the transitory effects of lower energy prices. The Bank sees the underlying trend of inflation at 1.6 to 1.8 per cent, which is consistent with persistent slack in the economy. The Bank's outlook for economic growth remains largely unchanged from its previous forecast with expectation of a solid recovery beginning in the second quarter.
With oil prices stabilizing and core inflation firming around its 2 per cent target, a further loosening of monetary policy is becoming more unlikely. If growth recovers as the Bank forecasts over the next couple of quarters, attention will shift once again to the timing of future rate increases. While we do not expect the Bank to act on interest rates for the remainder of the year, long-term bond yields and therefore mortgage rates are likely to rise from their current lows as growth improves and the US Federal Reserve begins raising its own target rate later this year.
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