BoC: Risks to outlook roughly balanced – RBC Economics

Research Team at RBC Economics, suggests that the financial markets and economists took the BoC’s downgrade to its growth forecasts, commensurate shift in the closure of the output gap and lower inflation profile in stride as the Bank now deems the risk to inflation outlook as roughly balanced.

Key Quotes

“The revisions put the Bank’s forecasts closer to the market consensus. In 2016, the Bank now looks for Q3 growth of 3.2% (prev 3.5%) with Q4’s growth rate cut to 1.5% from 2.8%. Further, the Bank now looks for the economy to grow by 2.0% in 2017 rather than 2.2%. The details of the 2017 forecast update show exports are now expected to contribute 0.8 ppts to the economy’s growth rate, down from about 1.0 ppt in both the April and July forecasts. Further, the Bank now expects investment in housing to act as a small drag on growth next year following the government’s recent policy actions. Conversely, the Bank upgraded the boost from government spending to real GDP in 2017 reflecting a shift in the timing of fiscal stimulus measures.

The tweaks to the growth forecast mean that economic slack will persist until the middle of 2018 and will exert downward pressure on core prices through 2017. This will limit the rise in the headline rate which is forecast to increase as the weight from energy prices reverses. The Bank sees the risks to this updated inflation forecast as “roughly balanced” though with that caveat it is within an environment of “heightened uncertainty” especially with respect to the export outlook.”