No Policy Change from Bank of Canada

January 17, 2012

Canada’s 1.0% overnight money rate target since September 2010 was left unchanged again as analysts expected.  In the new statement, policymakers reiterated that "there is considerable monetary policy stimulus in Canada."  New quarterly macroeconomic forecasts are modestly modified from those presented in October, but the gist of the forecast remains the same.  Economic growth will average 2.4% per annum in 2012 and 2013, with this year being the softer of the two.  A reestimate of present unused productive resources found somewhat less slack than assumed previously.  As before, this so-called output gap will be closing only slowly and not disappear until around September 2013, a quarter sooner than assumed before.  Once that happens, it becomes imperative not to allow GDP to expand faster than its supply-side potential.  Since GDP between now and late 2013 never heats up excessively, there is plenty of time before monetary stimulus needs to be withdrawn with any urgency. 

The profile on inflation reinforces the prudence of maintaining a growth-supportive stance for now.  With GDP rising just 2.0% this year, non-oil commodity prices easing, growth in unit labor costs only modest, and inflation expectations "well-anchored," total and core inflation is actually likely to slow in 2012 before rising back to the vicinity of the 2% target around the third quarter of next year.  Risks around this baseline profile are considered "roughly balanced over the projection horizon."  More details underlying the forecasts will be presented in the Monetary Policy Report due tomorrow.  Of particular interest will be why officials now consider the economy to have slightly less slack than measured in October. 

The next scheduled policy statement will be on March 8.  Ten rate hikes of 25 basis points apiece lifted the benchmark interest rate from a 2.0% cyclical low in 2004 to a peak of 4.5% reached in July 2007 and maintained until a 25-bp cut in December 2007.  That was the first of ten cuts, four of 25 basis points, five of 50 bps and one of 75 bps that slashed the rate to 0.25% by April 2009, a level maintained for 13-1/2 months.  In June, July and September 2010, three rate hikes of 25 basis points each raised the benchmark to its present 1.0% level. 

A pause in policy normalization declared in October 2010 was justified by the assertion that "the global economic recover was entering a new phase"  of fiscal consolidation, difficult labor market dynamics, and ongoing deleveraging in many advanced economies.  A prescient warning back in October 2010 declared that "heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery."  And that’s where things have stood policy-wise for the past 16 months.  Officials continue to monitor Canadian and global economic and financial circumstances but so far have not found reason to end the pause in rate tightening, nor have officials today dropped any specific hint of how soon that might be done.  In fact, the baseline forecast that imagines the next rate change to be upward assumes that European authorities implement sufficient measures to contain their crisis.  If that doesn’t happen, the next Canadian rate change could even be in the downward direction.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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