Bank of Canada Preview

October 19, 2009

The Bank of Canada’s overnight rate target hit a rock-bottom level of 0.25% in April, and officials then announced a commitment to hold the policy rate at that level until at least mid-2010.  Tomorrow’s statement will reiterate that pledge not to tighten before mid-2010  even though officials have said it has become apparent that Canadian growth in the second half of this year will be stronger than anticipated a few months ago.  New forecasts arrive with the Monetary Policy Report due Thursday but will be foreshadowed in the statement that is released tomorrow.  No reason exists to rethink the pledge to retain a 0.25% target interest rate for at least 8-1/2 more months.

  • Monetary conditions in Canada have in fact tightened considerably as a result of Canadian dollar appreciation.  Such is 5.7% stronger against the U.S. dollar than on September 10 when the previous policy announcement was made and up by  20.3% since April 21, when the promise to keep the rate low was first given.  The U.S. dollar has the largest weight by far in Canada’s trade-weighted index, and a 3% rise of that index has been estimated to approximate the impact of a 100-basis point increase of short-term interest rates.
  • Inflation is very low.  The total items CPI and core CPI indices each edged only 0.1% higher in September from August and posted respective on-year changes of minus 0.9% and plus 1.5%, each of which was a tenth less than the increases for the year to August.  Producer prices and raw material prices respectively dropped 6.7% and 26.4% in the year to August.
  • Economic data have been mixed.  The jobless rate fell for the first time in August since July 2008, declining to 8.4% from 8.7% in July.  Full-time workers leaped 91.6K in August, and overall employment increased 30.6K on top of a decent gain in July, too.  In July, wholesale turnover increased 2.8%, but real GDP was unchanged on the month.  Exports fell 5.1% in August (6.5% for non-energy goods), a sign that the stronger Canadian dollar is exerting a drag.  Canada had no gain in productivity in either the first of second quarters of 2009, and unit labor costs jumped 7.0% in 2Q when expressed in depreciating U.S. dollar terms.  U.S. unit labor costs, in contrast, fell 1.5% that quarter.

Canadian officials, who announce their decisions at 13:00 GMT on Tuesday, will remind the public that weekly auctions of the Term Loan Facility (TLF) and for Private Sector Instruments (PRA) will be phased out at the end of this month as already planned.

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



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