Bank of Canada Preview

January 17, 2011

The first of eight scheduled interest rate policy announcements in 2011 is set for 14:00 GMT on Tuesday.  Canadian monetary officials have three options: 1) keep policy in a pause and provide no hint of an increase at the next opportunity in early March, 2) make no immediate rate hike but start the process of preparing markets for a tightening reasonably soon, or 3) raise rates including the key overnight money target by 25 basis points to 1.25%.  The likeliest scenario is the second option, followed by the third and then the first. 

Starting in December from a 4.5% level, the overnight money rate target had been reduced ten times to 0.25% in April 2009.  Three increases were implemented more recently at sequential meetings held on June 1, July 20, and September 8, 2010 but a tightening pause was engineered at last year’s penultimate meeting in October and reaffirmed at the final one in December.  In October, officials affirmed the “the economic outlook for Canada has changed,” and the statement released in December concluded, “any further reduction in monetary policy stimulus would need to be carefully considered.”  Bank of Canada officials had projected a 3.0% annualized rise of real GDP in 2Q10, 0.7 percentage points higher than the actual increase, and their estimated growth rate in the third quarter of 1.6% annualized was likewise 0.6 percentage points faster than the actual outcome.  Canadian jobs rose 2.2% in the year to December but just 0.9% annualized between September and last year’s final month.

In the six weeks since the last policy meeting, the Canadian dollar has appreciated 1.5% against its U.S. counterpart.  Long-term interest rates have risen 13 basis points in Canada, and equities advanced 1.4% on balance.  U.S. growth prospects have brightened.  Canada reported October increases of 0.8% in retail sales and 0.2% in real GDP.  Industrial production that month climbed 0.4% on month and 6.2% on year.  A much smaller trade deficit of CAD 81 million was recorded in November due to a 3.2% slump in imports and a 0.9% rise of exports.  In the third quarter, capacity usage improved more slowly than earlier in the recovery to 78.1%, and productivity edged only 0.1% higher to 1.1% above its year-earlier level.  Consumer prices rose 0.2% in November and recorded an annualized 3.1% rate of decline over the latest three reported months.  The CPI was 2.0% greater than a year before, and core CPI inflation slowed to a below-target 1.4% from 1.8% in October.  PPI inflation stands at 2.1% and 1.6% excluding oil. 

In this era of policy transparency, monetary officials like to avoid major interest rate surprises.  Before a rate change is made, some kind of verbal hint is generally given.  In public remarks, Canadian officials haven’t encouraged investors to anticipate a rate increase in January, and the statements in October and December implied that the pause would extend at least to the meeting in March.  Markets aren’t positioned for an increase this week, but several analysts have recommended a tighter monetary policy stance.  Tuesday’s statement by the central bank will include new growth projections; those made three months ago called for 2.3% this year followed by 2.6% in 2012.  A new issue of the Monetary Policy Report with further detail of the thinking behind the current policy stance will get published on Wednesday.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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