Bank of Canada: No Rate Change Expected or Delivered

June 5, 2012

Canada’s 1.0% overnight money rate target was left unchanged as expected.  That said, the statement released by officials presents some interesting content.  The prior statement in mid-April had reintroduced for the first time in nine months a hint of tightening to come.  Today’s comment sticks to that view: “To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term.”  But the when and size dimensions of that forecast are immediately hedged with a caveat — “the timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments” — that did not appear in the April statement.

There are other differences between the April and June statements.  April’s comment opened on an upbeat note that global economic uncertainty “has decreased,” while today’s message declares that “the outlook for global economic growth has weakened in recent weeks.”  Europe’s circus is the major external concern but not the only one.  “Economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected.”  Depressants at home include fiscal restraint and “the persistent strength of the Canadian dollar.”  The statement also predicts sub-target total CPI inflation in the near term “as a result of lower gasoline prices” along with on-target 2.0% core inflation. 

Canada’s overnight money target was last changed in September 2010 when the third of three sequential 25-basis point increases was implemented. It would seem that the latest intensification of the European debt and banking crisis needs to stabilize before officials consider resuming a process of policy normalization.  It seems likely that a rate hike by the Bank of Canada will occur before the first hike in the Federal funds rate, but Canada’s next tightening could be still some distance away particularly if the Fed eases this summer.

The next scheduled Bank of Canada interest rate policy announcement is on July 17 and will be followed on July 18 by the release of the next Monetary Policy Report.

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



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