Canadian Monetary Policy Report – Highlights

January 18, 2012

The quarterly Monetary Policy Report (MPR) released today reiterates points made in yesterday’s announcement of an unchanged 1.0% overnight money rate target such as 1) projected GDP growth of 2.4% in 2011, 2.0% in 2012, and 2.8% next year; 2) assertions that the global economy has deteriorated and uncertainty has increased since the previous MPR in October; 3) the forecast that both core and headline consumer price inflation will each fall in the near term, lie below the 2.0% target much of this year and in 1H13, but then return to target in 3Q13; 4) a prediction of lower non-oil commodity prices going forward; and 5) and an admonition that the projected inflation trajectory is subject to a number of significant risks that on balanced appear to be roughly balanced in direction.

Today’s 31-page report adds a lot of color commentary to yesterday’s statement. 

Real GDP in the second half of 2011 expanded at around a 2.7% annualized pace, about twice as much as officials were assuming in the October MPC.  This overshoot means that Canada will be operating with marginally less slack during the policy horizon than assumed previously.  The so-called "output gap" that estimates the deviation of GDP from potential fully employed GDP amounted to about 0.75% late in 2011. 

The output gap will not close further during 2012, when both actual and potential GDP rise about 2.0%.  Newly projected GDP growth of 1.8% annualized in the first half of the year and 2.35% in the second half lies below the previous forecast by 0.3 percentage points and 0.65 percentage points, respectively.

As it has been for several years, net exports will not be a source of economic strength, accounting for just 0.3 percentage points of GDP growth in 2012 and none in 2013.  Final domestic demand, by contrast, is projected to account for 1.9 percentage points of real GDP growth this year and 2.8 percentage points of support in 2013.  Canada’s current account deficit is considered likely to remain at a hefty 3.1%  of GDP in the forecast period.  Net exports continue to be squeezed by a pricey Canadian dollar as well as weaker demand from export markets.

Canadian officials anticipate 3.3 percentage points (ppts) of fiscal drag in the United States during 2012-13, and 3.0 ppts of fiscal drag in the euro area during 2012-14.  For 2013, projected growth in the United States was revised down to 2.2% from 3.3%, while the forecast for Japan was reduced 0.8 ppts to 1.7%.  Projected euro area growth in the current year is now put at negative 1.0%, 1.2 ppts less than penciled into last October’s estimate.

The deterioration of global financial markets in recent months is expected to persist.  Financial market conditions in Canada remain comfortable, however:  "The aggregate supply and price of credit to businesses and households remain very stimulative."

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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