No Surprises from Bank of Canada

July 17, 2012

At least two years will have passed since the last change in Bank of Canada interest rates, and a statement released after the latest meeting of policymakers expresses contentment with the current stance, implying quite a while further before a change is made.  In 2010, three 25-basis points were implemented at successive meetings in early June, mid-July and early September.  The next and sixth scheduled interest rate policy announcement of 2012 will be done on September 5.  For now, the overnight rate target stays at 1.0%, flanked by a 0.75% deposit rate and a 1.25% Bank Rate.

In today’s statement, officials note weaker growth prospects since April in Europe, the United States and emerging economies including China.  They also observe “a sizeable reduction in commodity prices, which is depressant from global inflation and a moderating growth factor for Canada, a commodity exporter.  Some concern is expressed that the European crisis may not be contained, in which case the baseline growth projections would be too optimistic.  Persistent C-dollar strength is another economic headwind, and fiscal restraint will prevent government spending from augmenting the economic boost from private consumption and business investment.  Officials trimmed projected Canadian growth by 0.3 percentage points to 2.1% for 2012 and by 0.1 percentage point to 2.3% for 2013 but bumped up  projected GDP growth in 2014 to 2.5% from 2.2% assumed in April.  Full capacity is not expected to be restored until the second half of 2013, which is a revision from 1H13 and implies a later start-date for resumed rate normalization. 

The bottom line for inflation is essentially unchanged.  Core inflation will hover near the 2% target for the policy-relevant horizon, and total CPI inflation is likely to “remain noticeably below 2% over the coming year before returning to target around mid-2013.”  Labor costs are rising only moderately, and inflation expectations remain well-anchored in Canada.

As concluded in the prior two statements released in April and June, today’s forewarns that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”  But statement exudes no urgency in that regard, and if Fed policy should be eased further in the second half of 2012, Bank of Canada tightening would become a riskier proposition because such could make the Canadian dollar even more overvalued than it is already.

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

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