Previewing Bank of Canada's Rate Announcement Tomorrow

July 20, 2009

The fifth Bank of Canada scheduled monetary policy announcement of 2009 at 13:00 GMT on Tuesday is likely to extend existing policy parameters.  After halving the overnight target rate to 0.25% on April 21st, officials declared that level to be its effective lower boundary.  To give some future guidance, two additional actions were then undertaken.

  • A declaration that the target would not be raised before mid-2010 unless inflation is otherwise jeopardized.
  • A readiness to undertake quantitative easing (QE) was expressed but countered with the belief that such is unlikely to be needed.  If QE is done, officials promised to announce and explain such at a future policy announcement occasion.  Furthermore, if there is to be QE, three principles will not be compromised: the inflation target, jeopardizing healthy markets, and the central bank’s balance sheet.

The next policy announcement on June 4 retained the status quo but protested an “unprecedentedly rapid rise in the Canadian dollar” and warned that such could “fully offset” other positive factors such as improved financial conditions, higher commodity prices, and modestly more hopeful business and consumer confidence.  The Canadian dollar on June 4 was at 1.0967/USD, subsequently declined 6% to 1.1654 on July 1st but rallied back to 1.1013 earlier today.  Net securities transactions with non-residents generated an incredible C$ 19.9 billion capital inflow in May compared to C$ 7.8 billion in April and C$ 3.4 billion per month in the first quarter.  Canada’s trade position has been battered, and an uncompetitive exchange rate is a main reason why.  Exports fell 5.1% in April and by an additional 6.9% in May when such were also 33% lower than a year earlier.  The trade deficit of C$ 1.42 billion in May was significantly greater than anticipated.  Factory shipments, which have a big export content, sank 6.0% in May and 28.8% since July 2008.  The more forward-looking manufacturing orders dropped 7.2% in May and 37.7% over the last ten reported months

Canada remains in recession.  The index of leading economic indicators has posted ten straight declines, albeit by just 0.1% in its last two reported months.  Real GDP slid 0.1% in April and by 3.0% from a year earlier, led by a 0.7% further plunge in industrial production (down 9.9% on year).  Capacity usage fell by a record 5.6 percentage points in the first quarter to 69.3%.  Full-time jobs declined 106.2K in the last two reported months, May and June.  The unemployment rate of 8.6% is up six-tenths in the past two reported months but around a percentage point lower than its U.S. counterpart.  Wholesale turnover in May was unchanged in volume terms but down 0.3% nominally in May.  Retail sales in May, due Wednesday, are expected to reverse April’s 0.8% drop. 

Bank of Canada officials have a baseline forecast that sees sub-normal domestic and global recoveries.  The housing market is looking better, with housing starts recovering 20% between April and June.  Existing home sales rallied 8.7% last month.  New motor vehicle sales are doing better too.  The IVEY-PMI reading in June was at a 2009 high.  Expected inflation has remained consistent with the central bank’s target despite falling actual inflation.  Core inflation finally dipped under the 2% target and total CPI inflation crossed over zero to minus 0.3%  in June.  Producer prices tumbled 4.3% in the year to May, and wages are more subdued.  Officials expect core and actual inflation to return to target in the medium term, but concede somewhat negative risks around that forecast.

All in all, Canadian data have not provided as many green shoots as the indicators of many other economiesBut commodities are firmer, and Canada has shared in the rise of equities.  Without a verbal heads-up to prepare markets for a surprise, officials seem comfortable with not launching quantitative easing tomorrow but certainly will reiterate that the overnight target is staying at 0.25% at least into 3Q10.  Reiteration of concern about an excessively firm Canadian dollar seems probable.  We will know much more on Thursday, when Tuesday’s statement is explained in fuller detail by the Update of April’s semi-annual Policy Report.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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