Bank of Canada: No Rate Changes and No Surprises

October 20, 2009

The seventh of eight scheduled policy announcements in 2009 kept a target Canadian overnight rate of 0.25% and a Bank Rate of 0.5%.  The promise not to lift those rates before mid-2010, contingent on inflation consistent with the Bank’s forecast, was also kept.  These policy parameters were first put in place six months ago after a final rate cut of 0.25%.  The target interest rate had previously been reduced by 50 basis points in March, 50 bps in January, 75 bps in December 2008, 75 bps in two steps during October, 50 bps in April 2008, 50 bps in March, 25 bps in January, and 25 bps in December 2007 from a cyclical peak of 4.5%.

The central bank statement released today unveiled new GDP growth forecasts for 2009-11, which are compared below to prior estimates made in July and April.

GDP forecast Date 2009 2010 2011
October -2.4% +3.0% +3.3%
July -2.3% +3.0% +3.5%
April -3.0% +2.3% +4.7%

 

Canada’s economic recovery has begun.  But in contrast to slightly faster-than-assumed near-term growth, the longer term growth path has been revised down slightly to reflect “heightened volatility and persistent strength in the Canadian dollar,” which “is expected, over time, to more than fully offset the favorable developments since July.  The implications of such for the output gap (difference between actual and potential GDP at full employment) and inflation is that the former will not disappear until 3Q11, and the latter likewise will remain below its medium-term target of 2.0% until 3Q11 as well.  These prospects had previously been postulated to occur one quarter sooner in 2Q11.  Despite this one-quarter shift outward in the forecast, officials did not change the end-point on current policy being maintained.  That was held at mid-2010, although officials have always indicated that such represents the earliest date for a possible rate hike, not the latest or necessarily the likeliest timing.

To enforce the 0.25% target, the Bank of Canada will continue to hold auctions of fixed-rate regular term Purchase and Resale Agreements until at least end-January 2010, and a schedule of such tenders with their terms and conditions was attached to today’s policy statement.

Central Banks are showing varying tolerance for the depreciation of the U.S. dollar.  Bank of Canada officials have protested the situation more forcefully than, say, their Australian counterparts, and so their reaction is more consistent with officials at the ECB or Bank of Japan.  However, I wouldn’t make much of the harshness of Canada’s protest.  There really is no threat of intervention behind the ECB or Bank of Canada’s bark.  The Bank of Japan gets more mileage out of verbal intervention than other central banks like the Bank of Canada because of a history of selling yen to restrain upward pressure even though it’s been 5-1/2 years since yen sales were last executed.  Swiss complaints against excessive franc strength are likewise taken comparatively seriously by investors because the Swiss also have intervened and not merely vocalized displeasure with currency market developments.

From a record low of 1.6194 per U.S. dollar in January 2002, the Canadian dollar rose to a high of 0.9061 in November 2007, retreated to 1.3064 in March 2009, but rallied back to as high as 1.0207 per U.S. dollar last week.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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