The Bank of Canada slashes its growth forecast

REUTERS/Chris Wattie

(Reuters) - The Bank of Canada cut its growth forecast on Wednesday, citing a looming slowdown in housing and a weaker outlook for exports, but said fiscal stimulus, accommodative monetary policy and a strengthening U.S. economy should help in months ahead.

As expected, the bank held its overnight rate at 0.5 percent, where it has been since July 2015, even as it trimmed GDP forecasts for Canada, saying downward pressure on inflation will continue while economic slack persists.

"Given the downward revision to the growth profile and the later closing of the output gap, the Bank considers the risk around its updated inflation outlook to be roughly balanced, albeit in a context of heightened uncertainty," the bank said in a statement.

It cut its forecast for GDP growth to 1.1 percent in 2016 and 2.0 percent in 2017, down from 1.3 percent and 2.2 percent forecast three months ago, citing slower near-term housing resale activity and a lower trajectory for exports.

The projection implies that the economy will return to full capacity around mid-2018, "materially later than the Bank had anticipated in July." It estimated the current slack in the economy at between 1 percent and 2 percent.

The bank said the government's recent move to tighten mortgage and tax rules around housing was likely to restrain residential investment, dampen household vulnerabilities and leave the level of real GDP 0.3 percent lower at the end of 2018.

Canada's long housing boom has helped offset the oil price decline and a commodity slump, but economists believe slowing in most major markets - with the notable exception of Toronto - will hamper growth next year.

Once again, the bank pointed to exports for the economy's weaker-than-expected performance, saying that while recent export data are improving, that is not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar's past depreciation.

"Growth in exports over 2017 and 2018 are projected to be slower than previously forecast, due to lower estimates of global demand, a composition of U.S. growth that appears less favorable to Canadian exports, and ongoing competitiveness challenges for Canadian firms," it said.

While global demand appears to be improving, domestic demand is likely to remain weak "for some time" as activity in the resource sector bottoms out, but the drag from the commodity price decline is waning, the bank said.

(Reporting by Andrea Hopkins and Leah Schnurr; Editing by Frances Kerry)

NOW WATCH: There is a secret US government airline that flies out of commercial airports