Dovish Policy Mind-Set at Bank of Canada

July 17, 2013

Canadian monetary officials, now led by Stephen Poloz, decided to keep the overnight money rate target at 1.0%, its level since September 2010.  In a released statement, they were less equivocal in predicting that the rate will remain at 1.0%.  The forecast is still a conditional one, hinging on slack in the economy, a muted inflation outlook, and the rebalancing of household debt, but the world “significant” now modifies slack, replacing “continuing” used in the prior statement on May 29.  More importantly, whereas the prior statement asserted the “the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,”  the new text deletes “likely” and “for a period of time:”

The considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected.

Since the late May meeting, officials have downgraded global growth.  Canadian GDP is projected to expand 1.8% in 2013 and 2.7% in both 2014 and 2015.  Sub-target inflation is projected until mid-2015, the same projected timing when excess slack is fully reabsorbed.  Projections of Canada’s so-called output gap are fraught with error and prone to significant reestimation.  While the inflation and output gap paths are the same as assumed in April, a year ago officials were predicting full elimination of the output gap by the middle of 2013. 

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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