Canadian Economy Will Be Much Weaker In Q2 Because Of Wildfires: Bank Of Canada

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OTTAWA — The economy will be weaker than expected in the second quarter due to the Alberta wildfires, the Bank of Canada said Wednesday as it kept its key interest rate steady at 0.5 per cent.

The rate is a key factor used by Canada's big banks in determining their prime lending rate, which is used for variable rate mortgages and lines of credit.

The central bank said growth in the first quarter appears to be in line with its April forecast, although business investment and intentions remained disappointing.

stephen poloz

Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Canada, April 13, 2016. (REUTERS/Chris Wattie)

But the bank said the second quarter that ends June 30 will be much weaker than predicted because of the wildfires that devastated swaths of Fort McMurray, Alta., forced the evacuation of the city and resulted in the shutdown of several oilsands operations.

"The bank's preliminary assessment is that the fire-related destruction and the associated halt to oil production will cut 1.25 percentage points off real GDP growth in the second quarter," the bank said in its statement.

"The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins."

The bank had predicted growth of 1.0 per cent for the second quarter in its April monetary policy report.

It is expected to update its full outlook for the economy and inflation in its next monetary policy report on July 13, when it also makes its next rate announcement.

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A wildfire burns near Highway 63 south of Fort McMurray, Alberta, Canada, May 8, 2016. The Bank of Canada says wildfires in Alberta mean Canada's economic performance will be much weaker than expected in the second quarter. (REUTERS/Chris Wattie)

The Bank of Canada's announcement comes in the wake of economic data that suggests the economy ended the first quarter on a soft note after starting 2016 on a hot streak.

"In Canada, the economy's structural adjustment to the oil price shock continues, but is proving to be uneven," the bank said.

Retail sales figures for March, reported last week by Statistics Canada, were lower than expected and followed reports of lower manufacturing and wholesale sales results for the same month.

Statistics Canada also reported Friday that the annual pace of inflation climbed to 1.7 per cent in April compared with 1.3 per cent in March. Core inflation, which excludes some of the most volatile items, for the month was 2.2 per cent, up from 2.1 per cent in March.

The Bank of Canada said inflation is roughly in line with its expectations, with total inflation slightly below its two per cent target and core inflation close to two per cent.

The central bank also noted that the housing market continues to show strong regional differences, reinforced by adjustments ongoing in the economy.

"In this context, household vulnerabilities have moved higher," the bank said.

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