Dovish Statement from the Bank of Canada

October 25, 2011

The Bank of Canada left its 1.0% overnight money target unchanged as expected and released a more dovish statement than it had in September and much more dovish remarks than provided in July.  In June, July, and September of 2010, three increases of 25 basis points were implemented, but no rate changes have been made in the past 13-1/2 months. 

Officials now project that full employment of slack resources will not occur until the end of 2013, eighteen months later than expected previously.  That’s a huge revision, implying that the the future trajectory of interest rates can be shifted backward by an equal interval.  Both growth and inflation have been revised lower in 2011 and 2012.  In September 2011, officials still felt compelled to imply that the next rate change would be an increase by explicitly stating that “the need to withdraw monetary policy stimulus has diminished.”  That thought has been deleted entirely now and replaced instead by the new assertion that the risks to the inflation outlook have become “roughly balanced over the projection horizon,” which implies that the next rate change could be either down or up.  Officials do not want to be forced into easing, however, with “the target interest rate near historic lows and the financial system functioning well.”  They consider the amount of monetary stimulus to be “considerable.”

Highlights of the new economic landscape and prognosis are as follows:

  • Global economy has “slowed markedly.”
  • The euro are “is expected to experience a brief recession.”
  • U.S. real GDP growth will be “weak through the first half of 2012”
  • Canadian underlying economic momentum will remain “modest” until mid-2012.  Subsequent revival hinges on an improving global environment with dissipating uncertainty and increasing confidence.
  • Persistent Canadian dollar strength remains a significant headwind.
  • Growth in China and other emerging markets will moderate to a more sustainable pace.

Canadian GDP growth has been revised down to 2.1% this year and 1.9% in 2012 from forecasts of 2.8% and 2.6%.  Total CPI inflation is now considered likely to bottom out at 1.0%, the low-point of the plus-or-minus 1% range that surrounds the 2% target.  Core and total inflation are unlikely to be as high as 2% until late 2013.  A full update of the growth and price outlook will be released by the central bank tomorrow.  The next scheduled interest rate announcement is on December 6.

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



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