Pause Continues in Canadian Monetary Policy
December 4, 2012
Monetary officials decided to leave their interest rate structure unchanged after the last scheduled policy meeting of 2012, thereby extended a pause in tightening that dates back to the last rate hike in September 2010.
A released statement today reads very similarly to the previous one from October 23. The final summary and concluding paragraph is in fact identical.
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.
The continuing lack of any rate reduction to pare three summertime 2010 increases and the absence of quantitative monetary stimulus has solidified the Bank of Canada’s hawkish reputation and especially that of its leader, Mark Carney, who will be stepping upward to the Bank of England’s governorship effective next June. A persistently tight Canadian dollar implies tighter monetary conditions that the 1% target interest rate suggests. Canada had enjoyed better fundamentals than the United States for a while, but GDP growth of just 0.6% at an annualized rate between 2Q12 and 3Q12 was 2.1 percentage points slower than GDP growth last quarter in Canada’s southern neighbor. The C-dollar’s elevation has been helped by advantageous interest rate spreads amounting to 93 basis points on three-month deposits and 7 bps on 10-year bonds. Today’s statement attributes the weak third quarter partly to “transitory disruptions in the energy sector” but asserts that a quicker growth pace is likely to unfold next year, led by consumption and business investment.
The statement calls the slack in domestic economic slack “slight,” global financial conditions “stimulative,” commodity price levels “elevated,” growth in Canadian labor costs “moderate,” and expected inflation “well anchored” and likely to remain so. Officials project a gradual rise of total and core inflation back to the 2% target over the coming 12 months in response to the elimination of unused productive resources.
The statement cites two potential growth depressants — the rising burden of household debt and a recent decline in housing activity — but says that it’s too early to say whether the moderation in housing activity and credit growth “will be sustained.”
The first scheduled policy announcement of 2013 on January 23rd will be accompanied by a full update of the Bank of Canada’s outlook for the economy and inflation.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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