Bank of Canada Decides Rate

Data Release: Bank of Canada remains on hold, but sets the stage for near-term hikes as was widely expected, the Bank of Canada continued to hold its benchmark overnight rate target at 1.00% where it has been since September of last year.

In its communiqué, the Bank noted a laundry list of risks currently facing the global economy: the Tohoku earthquake, geopolitical risk in the Middle East and Northern Africa, European sovereign debt, and broader global inflationary pressures due to rapid emerging market growth. Ultimately, the Bank judged that despite these risks, the global economic recovery was becoming more firmly entrenched and is expected to continue at a steady pace.

Some key changes were made to the Bank’s forecast in preparation for the release of its quarterly monetary policy report tomorrow. Most notable is that the Bank now expects the output gap to close by mid-2012 – two quarters earlier than originally anticipated. The Bank also adjusted its expectation of real output growth in 2011 from 2.4% to 2.9% and in 2012 from 2.8% to 2.6%. The Bank noted that “higher terms of trade and wealth are likely to support a slightly stronger profile for household expenditures than previously projected.” 

While the communiqué also conceded that a number of temporary factors would likely push total CPI inflation to as high as 3% by the second quarter of 2011, this is a short-term phenomenon that reflects higher energy prices and ongoing changes to indirect taxes. The Bank noted that underlying inflation remains subdued.  That said, consistent with the quicker closing of the output gap, core inflation is now expected to hit 2% by the middle of 2012, two quarters earlier than originally anticipated by the Bank.

Key Implications

Despite the upgrade to Canada’s economic performance, today’s even-handed statement suggests that the Bank of Canada does not appear to be feeling enormous pressure to resume interest-rate hikes at this point in time.

From an inflationary perspective, the Bank is not entirely ignoring the impact of higher food and energy costs on inflation. The upgrade to both total CPI and core CPI inflation certainly reflects that. However, the Bank notes in particular that they are wary of the impact higher energy prices have on the Canadian dollar and the erosion in competitiveness on Canada’s export sector. Ultimately, they have to look past these volatile impacts towards the fundamental inflationary pressures facing the Canadian economy and the Bank feels that the current level of the overnight rate remains consistent with its inflation target.

More answers will be revealed when the Bank releases its April monetary policy report tomorrow morning, but at this point, it is clear that the Bank will upgrade its estimate of potential GDP, likely for both 2010 and 2011. We still believe that a July rate hike is the best bet. Notably, by that time the U.S. Federal Reserve will have completed its second round of quantitative easing, reducing the risk of further upward pressure on the Canadian dollar. The Bank today served up a reminder of the downside risks to growth and inflation surrounding the elevated Loonie.

 Article provided by:



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s