As you may know, the Bank of Canada has left the overnight lending rate unchanged. See article below of the TD Economics commentary. “In the wake of this announcement, we maintain our call that the BoC is more likely to wait until July to raise the overnight rate.”
January 18, 2011
Release: BoC leaves overnight rate at 1.00%, nudges up economic outlook
As widely expected, the Bank of Canada (BoC) left its overnight interest rate unchanged at 1.00% for a third consecutive meeting. The communiqué accompanying its decision was meatier than its brief December edition. The economicoutlook for this year in Canada was nudged up, mostly as a result of brighter near-term prospects in the United States, but also at the margin for Europe. Canadian real GDP is now expected to grow by 2.4% in 2011, a slight improvement over the 2.3% forecast of October. Economic growth for 2012 was also upgraded slightly, from 2.6% to 2.8%, which comes as more of a surprise given the temporary nature of the stateside boost obtained from the tax relief and QE2. With what is now judged to be more excess supply than thought in October, the BoC’s latest economic forecast remains consistent with the output gap closing at the end 2012, with inflation concurrently returning to its 2% target. A more detailed economic forecast will be available tomorrow with January’s edition of the BoC’s Monetary Policy Report. The BoC’s risk assessment has changed somewhat. While the December communiqué stated that “risks have increased [from October]”, today’s statement noted that “risks remain elevated”. The boilerplate statements that the current level of the overnight rate “leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada”, and that “[a]ny further reduction in monetary policy stimulus would need to be carefully considered.” were maintained.
Even while slightly upgrading its economic outlook, the BoC appears to have gone to lengths not to sound hawkish – to avoid igniting another surge in a Canadian dollar already above parity with the U.S. currency. In a dovish tone, speaking to the particular importance of international trade’s contribution to Canadian growth going forward, the BoC stated that “the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.” In the wake of this announcement, we maintain our call that the BoC is more likely to wait until July to raise the overnight rate. This would be shortly after the U.S. Federal Reserve is done implementing its second round of quantitative easing in June. The BoC’s next fixed announcement date is only six weeks away (March 1) and today’s communiqué did not signal a hike at this next meeting. Nonetheless, intrigue as to the specific timing of the next hike will still build in the months ahead. The March statement will be crucial to help determine whether markets should reasonably expect that to be as early as the spring or in the summer.
Pascal Gauthier, Senior Economist