Bank of Canada Policy Statement: Continuity and No Surprises

July 21, 2009

The fifth scheduled Bank of Canada policy announcement of 2009:

  • Retains an overnight rate target at 0.25% and unchanged levels of 0.50% for its Bank Rate and 0.25% for the deposit rate.
  • Repeats the pledge, first given on April 21st, not to raise the overnight target rate until at least mid-2010.
  • Announces new schedules of operations for the central bank’s term liquidity facilities for the weeks from July 27th to October 21st.
  • Avoids buying longer-term securities but endows policy with “considerable flexibility,” in other words not closing the door on such a contingency.
  • Revises GDP growth projections to -2.3% in 2009 from -3.0%, +3.0% in 2010 from 2.5%, and +3.5% in 2011 from +4.7% in 2011.  This is a smoother path than before.
  • Again identifies Canadian dollar strength as a growth depressant.
  • Concedes that core inflation in 2Q09 was higher than assumed but retains the view that such will drop in the the second half and not return to its 2% target until 2Q11.

All of the above were in line with analyst expectations.  In the debate over inflation versus deflation risks that will be spotlighted in Fed Chairman Bernanke’s testimony later today, the Bank of Canada statement calls the recovery in many countries “nascent” and warns that “effective and resolute policy implementation remains critical to sustained global growth.”  As for Canada, excess productive capacity, also known as the output gap, is not expected to be exhausted until the middle of 2011.  Bank of Canada policymakers rely heavily on an output gap model to conceptualize the interplay between economic growth and demand-pull inflation.  When production lies below theoretical activity at fully utilized productive resources, inflation tends to decline and vice versa.  With two years of lead time to mid-2011, it’s way too early to fret about accelerating inflation, and that is why officials feel safe in pre-announcing no policy tightening for the coming year, which would still leave them with a year of lead time to restore normal policy settings.

An Update of April’s semi-annual  Monetary Policy Report will be published this Thursday, and the next scheduled policy announcement is set for September 10th.

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



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