Upbeat Policy Statement from Bank of Canada

September 5, 2012

For many central banks, the last interest rate change was a reduction, and even more monetary authorities have signaled a bias to ease in the future if global risks become a more immediate threat to domestic economic conditions.  Not so Canada, where a statement released after this week’s sixth of eight scheduled policy meetings in 2012 retained a bias to raise, not lower, the 1.0% target interest rate in the future.

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. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

Today’s latest statement concludes with the same wording (see above) as those released July 17 and June 5.  This guidance regarding future policy was introduced initially after the meeting of April 17, the third one of 2012, only it led with the phrase, “In light of the reduced slack in the economy and firmer underlying inflation… ”

Today’s comment from officials conceded slower core inflation recently than expected but added, “with the economy operating near its production potential, it is expected to return, along with total CPI inflation, to 2 per cent over the course of the next 12 months.” The statement also predicts that exports probably will not surpass their pre-recession peak until early 2014, partly because of “the persistent strength of the Canadian dollar.”  Business investment continues to be a “solid” growth driver, followed by consumption, although the latter has slowed tentatively.  Financial conditions are characterized as “very stimulative.”  Altogether, officials still expect growth “to pick up through 2013.”  Even now, GDP is not far from its potential level and climbing close to the perceived non-inflationary speed limit. 

It has been exactly two years since the Bank of Canada last tightened its stance; rate hikes from a base of 0.25% were implemented in June, July and early September of 2010.  While keeping the overnight rate target at 1.0%, however, officials have presented  a more hawkish rhetorical presence this year than most central banks.  By doing so, the Canadian dollar is supported, and that keeps monetary conditions firmer than one otherwise might expect.  The next interest rate statement is scheduled for October 23, one day before the quarterly Monetary Policy Report is published.

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



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