Canadian Monetary Policy and Outlook Not Changed

July 19, 2011

The central bank interest rate structure, a 1.0% overnight money target flanked by a 1.25% Bank Rate and a 0.75% deposit rate, will be kept at least until the next scheduled policy announcement on September 7, at which point those rates will have be operative for 364 days.  Three rate hikes of 25 basis points in 2010 were announced on June 1, July 20, and September 8.  Today’s outcome had been expected especially amid recent “increased risk aversion and volatility in financial markets,” which today’s Bank of Canada statement underscored.

The statement unveils new growth and inflation forecasts that are little changed from those made in April.  Somewhat slower-than-anticipated growth last quarter is projected to be temporary, and projected 2011 GDP expansion was bumped downward just a tenth to 2.8%.  The growth projections for 2012 and 2013 of 2.6% and 2.1% are the same as April’s, and so is the projected mid-2012 time when Canada’s economy should return to full employment of productive resources.  Inflation is higher than thought previously but not by much.  Total CPI is now expected to be a bit above 3% in the near term instead of around that level, and core CPI is put at about 2% over the forecast period instead of a bit below such.  However, total CPI and underlying CPI are still projected to converge on the 2% target in mid-2012, the same time identified in the previous quarterly estimates. 

The biggest modification in the statement is the deletion of the word “eventually” from the policy guidance sentence that in the May 31, 2011 statement had read, “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target.”  This month’s statement explicitly assumes that European authorities are able to “contain the ongoing European sovereign debt crisis” and implies a more dovish policy scenario if that optimism proves unwarranted, which of course could happen. 

The latest thinking of Canadian monetary policy authorities will be explored in further detail in the July Monetary Policy Report, which gets published tomorrow.  Canada’s recovery has been developing better than America’s, as one would expect since public finances are in considerably better shape and because Canada benefits from elevated commodity prices.  These supports outweigh the drag of a strong currency.  Nonetheless, there is no urgency to resume credit tightening, which has been paused since last September.  Minutes released overnight by the Reserve Bank of Australia showed that policymakers there have turned more dovish.  The direction of Canada’s next interest rate change looks clearly skewed to the upside; today’s statement calls financial conditions “very stimulative” and private credit growth “strong.”   In contrast, analysts are starting to speculate that Australia’s next rate change might actually be a cut. 

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



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