But Bank of Canada Target Interest Rate Left Unchanged

December 6, 2011

Canada shares some similarities with Australia.  Both are commodity-intensive advanced economies.  The Canadian and Australian dollars are each historically high, points made in today’s respective statements from those country’s central banks.  Headline inflation exceeds target in both nations but is projected to fall in the future.  As noted, the Reserve Bank of Australia unwound the second of seven rate tightenings earlier today. 

In contrast, policymakers at the Bank of Canada, who had not yet begun to ease, again chose not to reduce their target rate.  A statement from Bank of Canada officials underscores the differences in the Canadian and Australian circumstances. 

  • Foremost, policy in Canada at present was already looser than in Australia.  That’s because the Reserve Bank of Australia had previously tightened its stance more than the Bank of Canada had.  After the global downturn, the Australian rate target was at 3.0%, well above the 0.25% trough in the Bank of Canada’s overnight money target.  The RBA then raised its rate seven times to 4.75%, a level attained in November 2010.  The Bank of Canada made just three increases, each also by 25 basis points, in June, July and September 2010.  The RBA statement notes that lending rates in Australia are now on a par with their 15-year average, whereas the Bank of Canada statement opines that “with the target interest rate [of 1.0%] near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada.”
  • While headline rates of inflation in both economies remains above the medium-term targets but expected to recede, the Bank of Canada statement makes some admissions against which the juxtaposition of a rate cut now could have appeared awkward in timing.  One is that second-half Canadian economic growth has evolved “slightly stronger” than assumed in the October Monetary Policy Report.  A second confession is that total CPI inflation has not only surpassed target but also is “slightly higher than projected.” 

Canadian GDP in the third quarter advanced 3.5% on quarter at an annualized pace, 1.5 percentage points faster than in its southern neighbor.  On-year growth in GDP of 2.4% was 0.9 percentage points better than the U.S. GDP rise of 1.5% between 3Q10 and 3Q11.  On-year Canadian CPI inflation was 2.9% in October, with a core rate of 2.1% being much closer to the inflation target of 2.0%.

This was the eighth and final Bank of Canada policy announcement of 2011.  The first one of 2012 is scheduled for January 17 and will be followed the next day by the release of the next Monetary Policy Report.  If potential global risk factors have materialized by then, the publication of a full review will afford a better context for communicating a cut the target interest rate than exists at the present time.

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



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