Bank of Canada Overnight Rate Target Staying at 0.25%

September 10, 2009

Canada’s last rate cut of 25 basis points to 0.25% was implemented on April 21st and accompanied by a conditional commitment not to raise rates before mid-2010.  There have now been three policy meetings since then, and each has retained that policy stance, which Bank of Canada officials believe is the appropriate way to promote a return to full capacity and the 2% inflation target.  This week’s meeting produced a statement that concluded that economic growth in the second half of 2009 could be stronger than indicated by staff projections in July that had penciled in annualized quarter-over-quarter growth of 1.3% in 3Q and 3.0% in 4Q with on-year declines of 2.9% and 1.2%, respectively.  Officials meanwhile said that growth, excess capacity, and inflation during the first half had evolved as assumed in the July assessment.  Recovery is being promoted by macro-economic stimulus, better financial conditions, firmer commodity prices and strengthening business and consumer confidence.  Information on the inventory cycle and automotive output point to recovery as well.   Growth risks are balanced, while overall price risks “are tilted slightly to the downside” by the “persistent strength” of the Canadian dollar among other things. Concern about recent exchange rate developments as a risk factor were mentioned in the June 4 statement, deleted from the July 21 statement and restored to today’s statement, and this time were coupled in a paragraph emphasizing that policy “retains considerable flexibility.”  This is a not-so-subtle hint that the future path of policy could be looser than otherwise if the strength of the Canadian dollar is not alleviated.

Indeed, the de facto tightening of Canadian monetary conditions as a result of Canadian dollar appreciation, detailed in Wednesday’s preview posting of this meeting, strongly suggests that the Fed funds rate will likely be raised sooner than the timing of the first hike in the Canadian overnight money target.

Canadian July trade figures released earlier today reinforce the optimism of officials regarding economic recovery.  Despite a swing back to a C$ 1.03 billion deficit from a trivial surplus in June, the data highlighted very robust monthly volume gains of 8.7% in imports and 5.9% in exports.  Two-way flows in machinery and equipment and in automotive products were especially large.  Nominal M&E exports and imports went up by 11.3% and 10.9%, while nominal automotive exports and imports soared 10.8% and 18.7%.  Much of the deterioration in the trade balance occurred in energy, where imports jumped 18.6% while exports fell by 3.2%.

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



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