OTTAWA – The Bank of Canada credited billions of dollars in federal investments for helping offset the ever-present negatives from the oil price shock as it stuck with its benchmark interest rate of 0.5 per cent Wednesday.
The Liberal government’s spending boost uplifted what would have been a modest downgrade to its economic growth forecast this year, the central bank said as it released updated projections.
The bank is now predicting the country’s real gross domestic product — a measure of economic growth — to expand by 1.7 per cent in 2016, up from its January expectation of 1.4 per cent.
“The mix of policies that we have today is a more favourable one for economic growth than what we had before,” Bank of Canada governor Stephen Poloz said in Ottawa.
Last year, Poloz lowered the bank’s trend-setting interest rate twice to soften the blow of the commodity slump. Both rate changes came at a time when the former Conservative government was seeking to curb spending in an effort to balance the books.
The Liberals, however, have introduced a different approach since winning last fall’s election.
In last month’s federal budget, they committed to about $25 billion in additional spending over the next two years for economy-lifting plans such as infrastructure projects.
The extra funding was contained in a fiscal blueprint that also projected five straight annual deficits totalling more than $110 billion, starting with a shortfall of $29.4 billion in 2016-17.
The bank expects the federal investments to more than offset the negative consequences of a slightly stronger dollar, weaker-than-expected global growth and shrinking oil sector investment.
“The combined effect of all these global and domestic developments would have been a modest downgrade of the bank’s outlook,” the bank said in a statement that accompanied its quarterly monetary policy report.
“However, the fiscal measures announced in the March federal budget will have a notable impact on GDP.”
When it comes to the decision to stand pat on the interest rate, Poloz said things could have turned out differently without Ottawa’s fiscal injection.
Poloz said if one were to remove the fiscal measures from the equation, the bank’s updated forecast would have looked a “little worse” than the projections it provided in January.
At the time, Poloz revealed that senior bank officials entered deliberations before the rate announcement with a predisposition toward making another cut.
“There’s no doubt in my mind that we would have at least had that same bias going into the discussion,” Poloz said Wednesday of the most-recent deliberations.
“How it would have turned out, of course, is very hypothetical.”
Using the same baseline numbers in Ottawa’s recent budget, the bank projected federal and provincial government spending to combine to contribute 0.5 percentage points to growth this year and 0.6 percentage points in 2017.
The Bank of Canada based its assessment on Finance’s growth assumptions, which it considered reasonable.
The Finance Department estimated the Liberal budget, which also includes measures to boost tax relief for middle- and low-income households, will generate economic growth of 0.5 per cent this year and one per cent in 2017-18.
The differences between how the impacts of the fiscal measures between the Bank of Canada and Finance were mostly due to how they were presented. For example, the bank’s numbers were based on calendar years, while the Finance projections were presented in fiscal years.
Poloz said there were only minor differences between the two sets of numbers.
Some observers were skeptical.
CIBC chief economist Avery Shenfeld wrote in a note that Poloz had no choice but to raise the 2016 forecast since his “boss,” Finance Minister Bill Morneau, has been “touting the benefits of fiscal stimulus” and because the economy saw surprisingly sturdy GDP growth in December and January.
“With that in mind, this was about as small a forecast upgrade as they could have chosen,” Shenfeld wrote.
Later, during the news conference, Poloz was asked about that remark.
“The finance minister, sorry, is not my boss,” Poloz said.
“The Bank of Canada is a fully independent policy-maker and we operate with independence under a five-year agreement with the government on an inflation target.
“So, I can tell you that if for some reason we were in total disagreement with some of the analysis that was in the budget, we would say so in our analysis.”
Even with the government spending, the bank lowered its 2017 growth projection to 2.3 per cent from 2.4 per cent. That’s because non-resource exports, while strengthening, aren’t expected to be as robust as previously thought due to the recent increase in the dollar.
For 2018, the bank is expecting growth of two per cent, a projection that doesn’t account for the potential impact of federal spending measures.
After a strong start to 2016, the bank is now predicting first quarter GDP to register 2.8 per cent, up from one per cent. It’s also anticipating one per cent growth in the second quarter of 2016, down from the January forecast of 2.2 per cent.
The bank said unexpectedly strong growth in the first three months of 2016 was partly due to temporary factors expected to fade with the loonie’s recent rise and slower international demand.
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