Bank of Canada Preview

April 16, 2012

Analysts about universally do not expect an interest rate policy change from the Bank of Canada.  The announcement after this year’s third meeting is due at 13:00 GMT on Tuesday.  Perceptions that the overnight money rate will be left at 1.0%, its level since September 8, 2010 is not fully supported as the right thing, however.  Canadian officials concede that the present stance is considerably stimulative.  Wage and price inflation exceed 1.0%.  The statement released after the previous policy meeting in early March said that inflation will follow a higher path than assumed previously, rising to the 2% core rate by mid-2012 instead of a year later, but maintained that medium-term price expectations remain firmly anchored.

Canadian real GDP advanced 2.5% in 2011 on average but just 2.2 between 4Q10 and and 4Q11 and 1.8% from the third quarter to the fourth at an annualized rate.  Employment jumped by 82.3% in March and rose 1.1% from a year earlier. 

Officials are reluctant to raise interest rates yet.  A big concern is that doing such would strengthen the Canadian dollar, since U.S. monetary officials have said that a rise of their federal funds target appears unlikely before late 2014.  Frequent mention by Canadian central bank authorities in recent years has been made of the currency’s persistent strength.  From an average value of 1.5696 per U.S. dollar in 2002, the loonie rose 46.2% to a mean of 1.0734 in 2007, a per annum appreciation of 7.9%, and it rose 2.0% per annum over then next four years to 0.9898 per USD in 2011.  Viewed differently, a year-to-April 15 mean of 1.0013 compared to a mean of 1.0299 in 2010, the exchange rate has flattened.  As a commodity exporter, one would expect the loonie to be more valuable now than a decade ago, and net exports have struggled to adjusted.  The trade surplus in February of C$ 292 million was much lower than forecast and below January’s surplus of C$ 1.95 billion. 

A second objection to tightening relates to uncertain and low external growth prospects with risks especially overhanging Europe, and a third is the substantial tightening of domestic fiscal policy that the government of Stephen Harper plans.  From a deficit of C$ 25 billion in the fiscal year that ended last month, near balance is to be restored by FY 2014-15,and a surplus of C$ 3.4 billion is penciled in for FY 2015-16.

A day after tomorrow’s interest rate statement, Bank of Canada officials are scheduled to publish their quarterly Monetary Policy Report.  These documents are very useful in provided detailed background behind the monetary policy stance.

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



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