Bank of Canada: Policy Stays on Hold

March 6, 2013

The last change in the Bank of Canada’s overnight money rate target was a 25-basis point hike in September 2010 to 1.0%.  Today’s rate decision reaffirms the continuing appropriateness of this 2-1/2 year old stance and indicates no urgency to change it soon.  Exports are not expected to return to their pre-recession level for about another year and a half.  Total and core inflation recently have been slower than officials assumed in their January Monetary Policy Report, partly because of the “persistent strength of the Canadian dollar.”

Core and total CPI inflation are expected to remain low in the near term before rising gradually to reach 2 per cent over the projection horizon as the economy returns to full capacity and inflation expectations remain well-anchored.  With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.

The previous interest rate policy statement released January 23rd had declared that “the timing of any such withdrawal is less imminent than previously anticipated.”  So today’s update is part of a progressive further delay in the likely timing of resumed rate increases.  Even at 1.0%, Canada’s central bank rate offers a premium of 75-100 basis points over the Federal funds target.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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