Bank of Canada Preview

April 11, 2011

The Bank of Canada will reveal the decision of its third interest rate policy meeting of 2011 tomorrow at 09:00 EDT (13:00 GMT).  The street consensus is looking for no policy change, as such could subject the Canadian dollar to even more upward pressure and because a general parliamentary election is being held in three weeks.  A very remote chance of a tightening nonetheless appears possible. 

  • Canadian economic growth has quickened.  Monthly GDP rose over 5.5% annualized between October and January.  Housing starts advanced 9% at an annualized rate between 4Q10 and 1Q11.
  • In their last full analysis and outlook, central bank officials assumed that oil prices would average $95, from mid-2011 through end-2012.  That’s 13-14% less than the current price.
  • Labor market statistics have been brisk.  Jobs climbed 1.9% annualized in 1Q. 
  • The ten-year Canadian government bond yield is 19 basis points higher than when monetary policymakers last met.

Three consecutive increases of 25 basis points were undertaken last year to an overnight target of 1.0%, but the last of these was done more than a half-year ago on September 8th.  The statement released after the March 1st used the adjective “considerable” not once, not twice but three times to describe 1) the challenges that exporters face because of “persistent strength in the Canadian dollar,” 2) the slack in the economy, meaning that Canadian GDP could expand for some time at a faster-than-trend pace without generating accelerating inflation, and 3) monetary stimulus still in place.  The first two usages point to no change in rates, while the last serves notice that current policy cannot be sustained indefinitely.  Regarding the first point, poor January trade data that saw the surplus plunge to CAD 16 million from CAD 1.7 billion in December and CAD 0.7 billion in January 2010 will likely deter any temptation to raise rates again just yet.  Moreover, seasonally adjusted consumer prices were unchanged in February in spite of commodity price pressures, and the core inflation rate was just 0.9%.

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



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