Canadian Monetary Policy Left Unchanged For Now

March 2, 2010

A new statement from Bank of Canada policymakers is more noteworthy for three dovish points from earlier statements that were deleted.  They are

  • Any mention of term Purchase and Resale Agreements.  The last scheduled one of these is set for mid-April.
  • Any mention of “flexible” policymaking.  Beginning with the April 2009 statement, which announced the final rate cut to 0.25% from 0.50%, each policy statement until this one had promised that the Bank would “retain considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework in the Bank’s Monetary Policy Report,” which was released last April 23rd.
  • In all prior statements since April 2009, officials also included the following inflation bias: “While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bond, the overall risks to its inflation projection are tilted slightly to the downside.”

Those changes help set the stage for a rate hike presumably on July 20th.  The policy over the past eleven months has had three components: 1) an overnight rate target of 0.25%, 2) a promise contingent upon the inflation outlook not being jeopardized to retain the current overnight policy rate until the end of the second quarter of this year, and 3) longer-dated Purchase and Resale Agreements to solidify confidence that short-term rates would not rise before mid-2010.

The next three policy statements are scheduled for April 20, June 1, and July 20 after which there will be just three more scheduled rate hike opportunities this year : September 8, October 19 and December 7.  Bank of Canada officials will need to act in increments of more than 25 basis points, as they will want the overnight target to be greater than 1.25% entering 2011.

Today’s statement acknowledges that recent growth and core inflation in Canada exceeded what officials had assumed.  This too indicates that rate increases will not be delayed beyond July 20 and will likely be greater than 25 basis points in size.  Real gross domestic product advanced 5.0% at a seasonally adjusted annual rate (saar) last quarter versus a Bank of Canada forecast of 3.3% saar.  The last quarter of 2009 saw personal consumption advance 3.6% saar and contribute 2.1 percentage points (ppts) of GDP growth.  Government spending rose 7.4% saar and accounted for another 1.9 ppts of overall growth.  Residential construction soared 29.7% saar and was responsible for 1.7 ppts of the rise in GDP.  Non-residential investment fell 8.8% saar and exerted a drag of 1.0 ppts.  Exports jumped 15.4% saar.  Net exports (1.5 ppts) and inventories (minus 1.2 ppts) nearly canceled one another out, leaving GDP growth at 5.0%.

Canadian core inflation accelerated to an on-year rate of 2.0% in January from 1.5% in three of the prior four months.  The Bank of Canada’s last Monetary Policy Report in January had projected core inflation of 1.4% in the current quarter, followed by 1.5% in the second and third quarters, 1.7% in 4Q10, 1.8% in 1Q11, 1.9% in 2Q11 and a return to the 2.0% target only occurring in the second half of 2011.  Today’s statement notes that excess slack and slower wage growth should mitigate the impact of stronger domestic demand on core inflation.  New forecasts from monetary officials will be published on April 22nd but foreshadowed after their next scheduled policy meeting on April 20.

Every policy statement since the one last June 4 has cited Canadian dollar strength as a negative growth factor.  Today’s did so as well despite the more bullish assessment of overall activity.  With the CDA/USD exchange rate at 1.0967 last June 4, officials remarked that the loonie’s rise had been unprecedentedly rapid.  Nine months later finds the Canadian currency just 1.4% stronger than then.  So the pace of Canadian dollar appreciation has leveled off, and the currency’s strength will not derail plans to tighten monetary policy in the second half of 2010.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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