Monetary Policy in Canada Left Unchanged as Expected

March 8, 2012

The Bank of Canada left its overnight money rate at 1.0%, the level since September 2010.  Although above the Great Recession low of 0.25%, 1.0% is "near historic lows, the financial system is functioning well, and there is considerable monetary stimulus in Canada," according to the latest statement from the Bank of Canada.  The statement calls Canadian economic prospects "marginally improved" since January and notes that "the profile for core and total CPI inflation are somewhat firmer than previously anticipated, as a result of reduced economic slack and higher oil prices."  Indeed, officials now project total and core inflation to hover around the 2.0% target over the whole forecast horizon.  That’s a notable deviation from the view in January when the last quarterly review was released.  At that earlier time, officials had thought inflation would be lower than 2% most of 2012 and not rise back to that target level until the third quarter of 2013. 

All in all, today’s statement suggests that the process has at least begun of anticipating a resumed series of normalizing rate hike.  That process began with 25-bp rate hikes in June and July of 2010 but was suspended after a third such increase in 2010.  The interesting thing here is that the Fed has conditionally anchored the Fed funds rate at 0-0.25% through late 2014.  With Canada likely to move before then, the Canadian dollar could in time start trending higher, even though Canada’s currency is even now considered pricey and continues to be a factor weighing on competitiveness and net exports.

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



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