Bank of Canada boosts outlook, holds key rate

Bank of Canada Governor Stephen Poloz arrives at a new conference at the National Press Theatre in Ottawa on Wednesday, April 13, 2016. (Sean Kilpatrick / THE CANADIAN PRESS)

OTTAWA -- The Bank of Canada says the federal government's multibillion-dollar spending boost has turned what would have been a modest downgrade to its 2016 growth forecast into an upgrade.

The central bank also kept its trend-setting interest rate locked at 0.5 per cent.

The bank expects the government investments of about $25 billion over the next two years to more than offset the negative consequences of a slightly stronger dollar, weaker foreign demand and shrinking investment in the oil sector.

It is now predicting the economy to grow by 1.7 per cent in 2016, up from its January expectation of 1.4 per cent.

Using the same baseline numbers in Ottawa's recent budget, it projects federal and provincial government spending to combine to contribute 0.5 percentage points to growth this year and 0.6 percentage points in 2017.

But even with the government lift, the bank lowered its 2017 growth projection to 2.3 per cent from 2.4 per cent.

This was the Bank of Canada's first monetary policy report since the Liberal government tabled its March 22 budget, which contained billions of dollars worth of spending measures and tax relief.

To help fund the plan, the budget projected five straight annual deficits totalling more than $110 billion, starting with shortfalls of $29.4 billion in 2016-17 and $29 billion in 2017-18.

The Finance Department estimated the Liberal budget, which includes measures to enhance infrastructure investments and 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 Bank of Canada based its assessment on the department's assumptions, which it considered reasonable.

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 of Canada numbers were based on calendar years, while the Finance projections were presented in fiscal years.