Bank of Canada Policy Unchanged as Expected

October 23, 2012

Canada’s overnight money rate target has been at 1.0% since three 25-basis point increases were implemented in June, July, and September of 2010.  A new statement released today 

  • Reaffirms that 25-month-long interest rate level.
  • States that the slowdown of global activity has been roughly in line with what officials were expecting.
  • Makes only marginal modifications to projected growth.
  • Observes a further rise of household debt.
  • Notes that core inflation has been lower than expected in recent months and is unlikely to return to the 2% target before mid-2013.
  • Pushes back the likely timing of total CPI inflation returning to 2% to the end of next year from mid-2003 assumed previously.
  • And drops the characterization of present monetary stimulus as being “considerable.”

All in all, this is a somewhat less hawkish statement but only to an insignificantly marginal degree.  The policy bias remains skewed toward restraint, but the two sentences of future rate guidance have been altered.  Those mild modifications are indicated in bolding below.  To wit, the term “over time” replaces “to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed.”  “Will likely be required” replaces may become appropriate.”   The final thought about household sector imbalances has been added.

Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target.  The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.

Real GDP, which advanced at an annualized 1.8% in both the first and second quarters, is now projected to grow 2.2% in 2012 as a whole, revised upward from 2.1% projected three months ago.  Growth in 2013 is now projected at 2.3%, unchanged from the prior estimate, and growth in 2014 has been revised to 2.4% from 2.5% assumed previously.  Subdued inflation of 1.2% overall and 1.3% in the core CPI as of September reflects a small output gap, moderate wage cost pressure, and anchored inflation expectations

The last of eight pre-scheduled interest rate announcements in 2012 will be made on December 4, but tomorrow sees publication of a full update of the Monetary Policy Report that outlines thinking on the economy and inflation including risks surrounding the baseline forecast.

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

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