Bank of Canada Preview: Street Consensus Looks for No Change

June 4, 2012

Analysts are not expecting the Bank of Canada to lift its 1.0% overnight target interest rate of 1.0% on Tuesday even though the Canadian dollar is 5.6% weaker than at the time of the prior rate announcement on April 17 when officials for the first time in nine months indicated that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”  Another reason why a rate increase might be tempting is the 140.5K increase of Canadian jobs between February and April, which was the greatest two-month increase since the span between December 1980 and February 1981.

Canadian dollar depreciation is actually a welcome development, and officials wouldn’t want to risk trimming this blessing by raising interest rates now.  The interest rate target has been at 1.0% since three hikes of 25 basis points each in June, July and September 2010.  Such a level is 75-100 basis points greater than the federal funds target of 0-0.25%.

Monetary officials have to guard against the worse global environment washing back into Canada’s domestic economy.  Canada is vulnerable because of falling commodity prices, diminished U.S. growth prospects, previous elevation of the Canadian dollar, fiscal restraint, and a drop in Canadian share prices of 6.4% since the April policy meeting. 

Canadian GDP grew only 1.9% at an annualized rate last quarter, considerably less than the 2.5% assumed by officials at the time of their April meeting.  That pace also matched U.S. growth in 1Q12, and the on-year increase of 1.8% was a shade less than a 2.0% advance in U.S. GDP.  Monthly GDP figures showing upticks of 0.1% in January and March flanking a drop of 0.2% in February suggest that economic momentum is weaker than even the quarterly numbers imply.  Inflation of about 2.0% as of April was consistent with Bank of Canada expectations, but upstream price pressures are easing.  The PPI was unchanged in April and just 0.4% higher than a year before. 

Canada has the best fiscal profile among the Group of Seven economies, but the current account is in deficit.  Such equaled 2.3% of nominal GDP last quarter, down from 2.8% in calendary 2011 and 3.1% of GDP in 2010.  Merchandise trade generated a C$ 2.39 billion surplus in 1Q12, larger than the C$ 2.32 billion surplus in all of 2011.

The Bank of Canada’s statement announcing its latest interest rate decision will be released at 13:00 GMT on Tuesday.

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



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