More Dovish Language from the Bank of Canada

October 23, 2013

As expected, Canada’s overnight interest rate was left at 1.0%, its level since a 25-basis point increase in early September 2010.  For the second time in this span of 37-1/2 months, officials backed away from signaling explicitly the likelihood of a gradual normalization of policy interest rates in the future.  Such a signal was given in statements released between July and October 2011, reintroduced in April 2012 and maintained until and through the September 2013 statement.  Neither today’s press statement nor the Bank of Canada’s October Monetary Policy Report, which also was released today, included such language. 

Today’s message from policymakers is dovish in other ways.

  • The projected elimination of an output gap was pushed out by six months to the end of 2015.  To have an output gap is to have excess aggregate supply.  Other things being equal, the implication is that inflation in such circumstances will trend lower.  Officials assume that the output gap at end-September was about 1.5% (the midpoint of a 1-2% range), and this is somewhat larger than its level in mid-2013.
  • Real GDP is now lower than the level officials had assumed when the previous MP Report was released in July.
  • Projected GDP growth has been revised lower for 2013 to 1.6% from 1.8%, for 2014 to 2.3% from 2.7% predicted three months ago, and to 2.6% in 2015 from a prior figure of 2.6%. 
  • Officials concede that the composition of global growth has become slightly less favorable for Canada.  Projected U.S. growth in 2014 has been revised downward to 2.5% from 3.1%.  Washington’s debt ceiling shenanigans are being taken very seriously.  All is clearly not well that ends well.
  • Officials are perplexed about the weakness of exports, which cannot be fully explained by trends in foreign economic activity, and household debt, which remains more excessive than hoped by this point.
  • The assumed upward path of inflation is flatter than before.  The inflation target is 2.0% but printed in 2Q13 at 0.7% overall and 1.2% for core inflation.  By 2Q14, total inflation is likely to be still under 1.5%, and it will not show exceed 1.9% until the final quarter of 2015, according to latest Bank of Canada simulations.  Like the output gap, that’s a revision from 2Q15 assumed previously.  This more subdued inflation profile has been adopted in spite of a higher oil price assumption, which runs $3-5 above what the July MP Report had presumed.
  • For the record, officials still believe that risks to the inflation profile are “balanced,” but that view now comes with a warning: “the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance.”  These risks include weaker-than-assumed exports, a more protracted and difficult Ezone recovery, and a disorderly unwinding of household imbalances. 

The next Canadian interest rate announcement is scheduled for December 4.

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



Comments are closed.