Bank of Canada Retains 1.0% Money Rate Target & Releases New Forecasts

July 16, 2014

Canada’s overnight interest rate target has been at 1.0% since a 25-basis point hike in September 2010 and is likely to stay at that level for quite a while longer.  In its released statement after this year’s fifth of eight policy meetings, officials called their accommodative stance “appropriate” and declared continuing neutrality “with respect to the timing and direction of the next change.”  The statement downgrades the global economic outlook, acknowledges that inflation has risen sooner than anticipated a few months ago but attributes such to temporary factors. Attainment of on-target 2.0% inflation in 2016 depends on the economy returning to full capacity.

Greater insight into the thought process of monetary officials is provided in the quarterly Monetary Policy Report, which also was released today.  Projected growth in the third and fourth quarters of this year were each bumped lower to 2.3% followed by 2.4% (from 2.6% and 2.5% predicted in April), and full-2014 growth is now envisaged at 2.2%, revised from 2.3%.  The latest forecast then calls for GDP to rise 2.4% in 2.15 and 2.3% in 2016.  More importantly, officials now do not expect the restoration of full capacity until mid-2016 instead of end-2015, which had been their previous expectation.  Any time that timing gets pushed back — and this has happened several times in the past — it means that interest rate hikes needn’t resume until a later point.  Indeed, the presence of economic slack persisting longer into the future caused officials to revised projected total and core CPI inflation for 2015 lower.  Core inflation was bumped down 0.1 percentage points from 2Q15 through mid-2016.  Total CPI inflation is now seen at 1.7% in 2Q15, 1.8% in 3Q15 and 1.9% in the final quarter of next year; officials had previously predicted 2.0% on-year inflation for each of those three quarters.

The downgrade of the global growth outlook, which  is the main driver of the tweak in forward policy guidance, is broken down by region in the Monetary Policy Report.  U.S. GDP in 2014 has been revised to an estimated growth rate of 1.6% from 2.8% assumed three months ago.  Ezone growth is downgraded to 0.9% from 1.1% and China to 7.2% from 7.3%.  Japan’s outlook was bumped up to 1.3% from 1.2%, but the rest of the world’s growth was knocked down to 2.9% from 3.2%.  The culprits behind the “serial disappointment” with global growth in recent years are “private-sector deleveraging, fiscal consolidation, and, especially, the effects of uncertainty on business investment and trade.”  The assumption of faster Canadian growth ahead “hinges critically on stronger exports and business investment.”

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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