Dovish Bank of Canada Statement

December 7, 2010

Policymakers at the Bank of Canada today as expected left their overnight money rate target at 1.0%, its level since September 8th.  Today’s statement of explanation ends with the added sentence, “any further reduction in monetary policy stimulus would need to be carefully considered.”  The note of enhanced caution comes after the following observations:

  1. GDP growth in the second half of 2010 now appears slightly weaker than officials had assumed when they met previously in mid-October.  On November 30th, third quarter growth was reported at just 1.0% annualized versus 1.6% projected in the Bank’s last Monetary Policy Report.  Stronger growth of 2.6% was at the same time projected for 4Q10.
  2. Net exports are exerting a bigger drag than anticipated.  Such amounted to 3.5 percentage points last quarter.  Net exports continue to be depressed by disappointing productivity growth and Canadian dollar strength.  Labor productivity fell 0.8% in the second quarter and recorded on-year growth then of just 0.8%.  Translated into U.S. dollars, Canadian unit labor costs increased 13.7% between the second quarter of 2009 and the second quarter of 2010.
  3. Global economic downside risks have increased as a result of sovereign debt concerns.
  4. Significant excess supply persists in Canada.
  5. Domestic “inflation dynamics have been broadly in line with the Bank’s expectations, and the underlying pressures affecting prices remain largely unchanged.”  Officials revised down their inflation outlook at the October meeting, and this sentence is meant to disavow any thought that a 0.7% on-month spike in the seasonally adjusted all-items CPI in October has caused second-guessing by officials of their new inflation projections.
  6. Although “considerable monetary stimulus” is presently in place, that is necessary now in order not to undershoot the 2% medium-term inflation target.

The last cyclical peak of Canada’s overnight target rate was at 4.5%, which was cut initially three years ago in April 2007 by 25 basis points to 4.25%.  Another 125 basis points of rate reduction were engineered at the first three policy meetings of 2008, followed by a half-year pause.  From October 2008 through April 2009, the rate was cut six more times by 275 bps altogether to 0.25%, a cyclical low that was maintained for the next 14 months.  Three hikes of 25 bps each were implemented this year on June 1, July 20 and September 8th.

This was the eighth and final scheduled Bank of Canada policy meeting of 2010.  The first rate announcement of 2011 will be made on January 18 and be followed a day later by the publication of the next Monetary Policy Report.

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

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