Canadian Central Bank Interest Rate Settings Left Unchanged

January 18, 2011

Bank of Canada officials decided to keep its overnight money rate at 1.0%, flanked by a 1.25% Bank Rate and a 0.75% deposit rate.  A new statement from monetary officials does not flag a heightened likelihood of a near-term rate increase, concluding instead with the same language used in the prior December statement:  “This leaves considerable monetary stimulus in place, consistent with achieving the 2% inflation target in an environment of significant excess supply in Canada.  Any further reduction in monetary policy stimulus would need to be carefully considered.”

Even without tightening policy at its last three meetings, including this week’s, Canada retains a decent-sized central bank rate premium vis-a-vis the fed funds target of 0-25%.  Until June 1, Canada’s money rate target had been at 0.25% before rate increases that month and in July and September.  “Persistent strength in the Canadian dollar” was cited in the statement as a likely continuing restraint on growth and a reason that Canada’s current account deficit is at its widest in twenty years.  The inference is that officials are reluctant to create even more incentive for interest-sensitive capital inflows. 

Today’s statement bumps up projected GDP growth by a tenth to 2.4% in 2011 and two-tenths to 2.8% for 2012.  But the projected date of a return to full capacity, end-2012, was not changed, nor was the projected timing of a convergence of headline and core CPI inflation at the targeted 2.%, which also is seen happening at the end of 2012.  Canada’s recovery was declared to be “proceeding broadly as anticipated,” while the global recovery is deemed to be “somewhat faster than the Bank had anticipated.”

Goldman Sachs recently singled out the Canadian dollar as a currency with upward potential because of its close ties to the United States and because the Aussie dollar appeal had been tarnished lately by heavy flooding in Northeast Australia.  The loonie is now 0.4% softer than earlier this morning.  Analysts weren’t expecting a rate hike today, but the possibility of flagging a move at the next March 1st policy announcement was anticipated by many.  That didn’t happen.  The Canadian dollar remains on the strong side of dollar parity, and if such factors as firm commodity prices, stronger U.S. economic growth, and qualms about Australia persist, today’s decision is not likely to prevent eventual Canadian dollar appreciation.

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



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