Bank of Canada Interest Rate Statement: Less Dovish Tone

April 17, 2012

As expected, the Bank of Canada Board voted to retain a 1.0% overnight money target.  That’s been the goal since the third of three straight tightenings in September 2010.  The newsworthy component of a statement released by officials is a notice that the end of 19-month-long policy pause may be nearing.  For the first time in nine months, the statement endorses the need for less stimulus in the future:

In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.

A number of revisions in tomorrow’s quarterly Monetary Policy Report were revealed.

  • Projected GDP growth in 2012 is now put at 2.4%, up from January’s 2.0% forecast and an assumed 1.9% last October.
  • Inflation will not dip in the near term as far as assumed three months ago and will return to the 2% target both in headline and core terms by 2Q13, a quarter sooner than predicted in January and two quarters sooner than assumed in last October’s report.
  • One reason for the stickier inflation outlook is higher prices for gasoline and other commodities.
  • Another cause behind the new inflation prognosis is reduced resource slack.  Full employment will return some time in the first half of 2013 rather than in 3Q13 as assumed three months ago or 4Q13 as predicted in last October’s report.

Today’s statement continues to mention “persistent strength of the Canadian dollar” and foresees private domestic demand accounting for “almost all of Canada’s economic growth over the projection horizon.”  Government spending growth will be “quite modest” because of fiscal austerity, and net exports will recover weakly.  After this year, real growth will again expand 2.4% in 2013 but slow modestly to 2.2% in 2014.  Real GDP advanced 3.2% in 2010 and 2.5% in 2011.  Including the Bank of Canada’s forecasts for 2012, 2013, and 2014, the average growth rate over the five years to 2014 works out to 2.5% per annum.

The next scheduled policy statement arrives June 5 and could unveil a 25-basis point rate hike depending on developments between now and then.

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



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