Bank of Canada Fails to Cut Rates

June 10, 2008

The more anti-inflationary tone of all central banks in recent days took another giant step forward when a universally expected 25-basis point rate cut in Canada was not announced. Instead, Bank of Canada officials revised their forecast for total CPI inflation to above 3% later this year. CPI forecasts for 2H08 had previously been pencilled in at 1.5% last January and at 1.9% in April, so this change was not a trivial one. A statement released at 13:00 GMT today blamed higher commodity prices, stronger global growth, signs that Canada’s non-inflationary speed limit may be lower than thought, and subsiding downside inflation risks for the new outlook. Officials aborted plans to cut rate in spite of negative Canadian growth in 1Q08 and their forecast that excess aggregate supply would persist for the rest of 2008. They consider their monetary policy stance to be “appropriately accommodative” to eliminate excess supply and to return inflation to its 2.0% target. Therefore, an advisory contained in the three prior statements that further monetary stimulus might be required has been dropped. No hint of a rate hike in the future was inserted, however. After 150 basis points of rate cuts in four steps between December and April from 4.5% to 3.0%, it’s back to wait-and-see mode.

Earlier today, Canadian trade figures for April showed a smaller, but still solid, surplus of C$ 5.11 bln. The 10.3% drop from March reflected a price-intensive 19.0% jump in energy imports. All other imports actually fell 2.5% m/m and 4.3% y/y. Overall imports went up 2.6% m/m versus a 0.8% rise in exports. On-year growth in total trade of -1.0% for exports and 0.5% for imports is reflective in this highly open economy of weak economic activity. No economy is more exposed than Canada to weak U.S. domestic demand, and the Bank of Canada statement made a point to note that “the composition of U.S. growth has not been favorable for demand for Canadian goods and services.”

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