Bank of Canada Maintains 0.50% Overnight Money Rate Target

September 9, 2015

The Board deliberates interest rate policy eight times per year and had cut the interest rate target at two of the five earlier meetings in 2015.  Canada experienced a real GDP contraction in each quarter of the year’s first half.  When the key rate was sliced July 15 to 0.50% from 0.75%, the action was accompanied by a newly updated Outlook for the economy and inflation that marked down projected 2015 growth significantly to 1.0%, anticipated a resumption of positive growth in the third quarter, and forecast 2.5% growth in both 2016 and 2017. The all-important output gap, which measures excess supply and determines the path of core inflation, was likewise revised significantly upward, and officials then added that it would not be fully closed until sometime in the first half of 2017, later than thought previously.  That’s when core inflation should return to the 2% target on a sustained basis. 

Today’s statement affirms the appropriateness of the 0.50% overnight money target, which is flanked by a 0.25% deposit rate and a 0.75% Bank Rate.  Economic data since July’s easing of policy have been consistent with the revised outlook then unveiled.  “Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors” and “exchange rate-sensitive exports are regaining momentum.” 

Analysts were not anticipating a third interest rate cut at this time, and the statement avoids language that might promote such speculation.  Regarding Canada’s currency, the statement notes that depreciation up to this point has been constructive in promoting complex adjustments that will “take considerable time” to complete, but officials also did not indicate a wish to see the C-dollar fall still further. The next full Outlook and interest rate decision are scheduled for October 21st.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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