Canadian Monetary Policy Left Unchanged

December 8, 2009

Bank of Canada policymakers agreed once again to retain a 0.25% overnight money target and, contingent upon the correctness of its inflation outlook, not to raise that rate before mid-2010.  The benchmark rate has been at 0.25% since a 25-bp rate cut on April 21.  From a cyclical peak of 4.5%, such had been cut previously by 25 bps in December 2007 and January 2008, 50 bps in March and April, 75 bps in two moves during October 2008, 75 bps in November, and 50 bps in January and March of this year.

A statement released today by the Bank of Canada speaks of remaining significant economic fragilities, weaker-than-projected Canadian GDP growth in 3Q09 and the potential drag on growth and inflation of persistent strength in the Canadian dollar.  The baseline economic growth forecast calls for improvement as the projection period unfolds and for a rise of inflation to the 2% target but not until the second half of 2011, some 18-24 months from now.  The risks associated with this inflation forecasts “are tilted slightly to the downside” even though core inflation has lately been slightly higher than anticipated.

Canadian officials continue to protest Canadian dollar strength in a passive way, meaning that no action is going to be taken to weaken the currency, nor has basic monetary policy been sidetracked because of the loonie’s appreciation.  The promise is to leave the key rate at 0.25% until at least mid-2010, and that is no different than the Fed’s implicit intent in Fed Chairman Bernanke’s remarks yesterday.  The U.S. dollar, unlike the Canadian dollar, has seen its value eroded in 2009 and through most of this decade.  So the policies are similar in spite of very different circumstances surrounding the Canadian and U.S. dollars.

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



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