A More Hawkish Bank of Canada Policy Statement but Key 1.0% Rate Retained

May 31, 2011

The Bank of Canada last raised its overnight target interest rate on September 8, 2010.  Increases of 25 basis points each had been implemented at three straight meetings In early June, mid-July and early September.  Amid slower growth, policy was then paused, but today’s meeting concluded with a stronger signal that more increases are coming.  The prior statement on April 12 this year ended, “Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”  That language was modified today to read, “the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.”

Today’s statement projects continuing elevated commodity prices, broader global inflationary pressure, and temporary supply chain disruptions that will restrain Canadian GDP growth in 2Q before such reaccelerates in the second half of the year.  Core and total CPI inflation are seen converging upon the 2% target around the middle of 2012.  The next scheduled interest rate announcement will be made on July 19, followed one day later by a new quarterly Monetary Policy Report with updated price and growth forecasts.  Given the lagged effect of a change in interest rates and in light of the extensive monetary stimulus still be provided by a target interest rate of only 1%, a fourth rate hike will probably be made either after the July meeting or the ensuing meeting in early September.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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