|It is no surprise that the Bank of Canada maintained its target overnight rate at 1/2 percent today, reaffirming its view that the Canadian economy is still operating with considerable slack despite strong employment growth and inflation remains below the 2 percent target. The policy statement highlighted that that “uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States.” Trump’s ascendancy to the highest office in the US portends major policy changes, some of which could have a direct impact on Canada.
For now, the Bank has chosen to incorporate assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. US growth in 2017 was revised up only slightly, from 2.1 percent to 2.2 percent. The impact of the new administration’s fiscal stimulus is more pronounced in 2018, increasing the Bank’s forecast to 2.3 percent (up 0.3 percentage points from the October forecast). These are initial estimates, which include changes in tax policies only. Clearly, an important factor impacting Canada will be US trade policy. The impact of this and other fiscal measures will be updated in future Bank of Canada reports as more details become available.
The Bank’s forecast for US growth is above its estimate of the rate of potential US output expansion of about 1.8 percent in 2018. The economy is judged to be already at or near full capacity. Business investment in the US is expected to regain momentum as growth in demand remains above potential output.
Bond yields around the world, including here at home, have risen in anticipation of more stimulative fiscal policies and deregulation in the US, though financial conditions remain accommodative (Chart 1).