Bank of Canada Releases Less Dovish Statement

April 20, 2010

At the third of eight scheduled monetary policy meetings in 2010, the Bank of Canada took three actions, the gist of which points to an initial rate hike getting announced on June 1 after the next meeting.  Remarks by officials including a major address by Governor Carney on March 25 already had prepared investors for today’s shift.

  • The overnight rate target was left at 0.25%, where such has been since April 2009.
  • A conditional commitment not to raise rates until after mid-2010 was removed.
  • A program of extra longer-term Purchase and Resale agreements used to boost market liquidity and underline the conditional rate guidance was ended.

Today’s statement from Canadian policymakers, which precedes publication of the Bank of Canada’s Monetary Policy Report due Thursday, unveils new growth forecasts, compared below to the evolution of previous projections made at the indicated months.  The shift to faster growth in 2010 is partly at the expense of slower subsequent growth and reflects stronger-than-anticipated near-term global growth, Canada’s very strong housing market, and the assurance that macroeconomic stimulus would not be withdrawn prematurely.  Growth will continue to be constrained by a strong exchange rate, poor relative productivity, and the low level (not growth) of U.S. demand after the Great Recession.

GDP-f, % 2010 2011 2012
April 2010 3.7 3.1 1.9
January 2010 2.9 3.5  
October 2009 3.0 3.3  
July 2009 3.0 3.5  
April 2009 2.3 4.7  


The previous commitment not to lift rates until 3Q10 was conditional on the inflation outlook not changing for the worse, but that stipulation in fact no longer holds.  Core inflation was higher than assumed in the first quarter of this year and will be near, not below, target for the rest of the year, while total CPI inflation is now projected to hover slightly above 2.0% at least through the middle of next year.  The responses of ending the conditional commitment to keep a 0.25% target interest rate until midyear and unconventional liquidity enhancements is meant to alert the financial community to the likelihood of a rate increase on June 1.

Several clues in today’s statement suggest the rate hike at the start of June will probably be by no more than 25 basis points.  First, officials reiterated that “considerable uncertainty remains about the durability of the global recovery.”  Second, Canada’s output gap — the excess of aggregate supply above aggregate demand — is not expected to disappear until sometime a year from now in the second quarter of 2011, by which time economic growth should be already decelerating.  Third, projected growth of 1.9% in 2012 is pretty meager.  Remember that GDP sank 2.6% last year, and several potential drags on future growth persist like the high exchange rate.  A fourth factor would seem to be that other central banks, which already have begun to raise rates like Australia and India, are moving in increments of 25 basis points.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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