Bank of Canada Maintains Overnight Rate Target At 1/2 Per Cent

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The global economy is progressing largely as the Bank anticipated in its January Monetary Policy Report (MPR). Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating. Although downside risks remain, the Bank still expects global growth to strengthen this year and next. Recent data indicate that the U.S. expansion remains broadly on track. At the same time, the low level of oil prices will continue to dampen growth in Canada and other energy-producing countries.

Prices of oil and other commodities have rebounded in recent weeks. In this context, and in light of shifting expectations for monetary policy in Canada and the United States, the Canadian dollar has appreciated from its recent lows. With these movements, both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR.

Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector.

Inflation in Canada is evolving broadly as anticipated. The factors that pushed total CPI inflation up to 2 per cent will likely unwind in the months ahead. Measures of core inflation are at or just below 2 per cent, boosted by the temporary effects of past exchange rate depreciation. Material excess capacity in the Canadian economy will continue to dampen inflation.

An assessment of the impact of the upcoming federal budget’s fiscal measures will be incorporated into the Bank’s April projection. All things considered, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Information note

The next scheduled date for announcing the overnight rate target is 13 April 2016. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at that time.

Source: Bank of Canada.ca

OECD Sees BoC Starting To Hike Rates In May, ‘Steadily Thereafter’

The Organization for Economic Co-operation and Development believes the Bank of Canada will start raising its key interest rate next spring – about six months ahead of what most economists believe and what the central bank has been implying.

In the OECD’s twice-annual Economic Outlook, released early Tuesday, the international economic policy and research body argued that Canada’s low and economically stimulative 1.0-per-cent central bank rate “will need to be gradually withdrawn to counter inflationary pressures,” as its economy grows toward reaching its full output capacity.

“It is assumed in this projection that the first policy rate increase occurs in late May of 2015, and that rates rise steadily thereafter,” the outlook report said.

Most economists don’t expect the first Canadian rate increase until the fourth quarter of 2015, based on the signals central bank officials have been giving in recent months. The bank has said it believes Canada’s output gap won’t close until the second half of 2016, around the same time that inflation has settled around the bank’s target rate of 2 per cent “on a sustainable basis.” And while the central bank has said that it takes six to eight quarters for a change in interest rates to exert its full effect on inflation, senior bank officials have also been clear in recent months that they are leaning toward keeping rates lower for longer in the current cycle, given the numerous risk factors hanging over the uncertain the global economy.

But the OECD argued in its report that while “uncertainty” over the amount of slack in Canada’s economy justifies the Bank of Canada standing pat on rates for the time being, “it will have to start to withdraw stimulus as remaining slack is progressively taken up.”

The OECD projects that Canada’s economy will grow by 2.6 per cent next year and 2.4 per cent in 2016, slightly above the Bank of Canada’s base-case forecasts of 2.4 per cent in 2015 and 2.2 per cent in 2016.

This isn’t the first time OECD economists have been at odds with the Bank of Canada’s interest rate trajectory. A year ago, when the OECD released its fall 2013 Economic Outlook, it called for the central bank to both begin rate hikes earlier and increase rates more steeply than the bank had been signalling. Then, as now, the OECD was concerned about a build-up of inflationary pressures as the Canadian economy picked up momentum.

At the time, the OECD’s concern looked misplaced, given that inflation was below 1 per cent. And, indeed, its call for rate increase to begin before the end of 2014 was, in retrospect, premature.

But 12 months later, Canada’s inflation picture may make the OECD’s argument more compelling. Last week, Statistics Canada reported that the country’s total Consumer Price Index inflation rate in October was 2.4 per cent, its highest since early 2012. The so-called “core” inflation rate, which excludes the most volatile components of CPI and is the Bank of Canada’s key guide to underlying inflation trends, was 2.3 per cent last month, its highest since the end of 2008.

The OECD said Canada’s improving growth next year will be driven by rising export demand, particularly from the United States, which accounts for three-quarters of Canada’s exports. The OECD expects the U.S. economy will grow 3.1 per cent next year, its strongest in a decade and the highest among major advanced countries.

But in a conference call with reporters, OECD chief economist Catherine Mann cautioned against countries counting too much on resurgent U.S. demand to be the catalyst for their export-led recoveries. She noted that U.S. consumption and imports has lagged its typical pace in a recovery, implying that consumers have slowed their spending in the current cycle.

Ms. Mann suggested that rising income inequality may be behind the lack of consumer demand growth in the United States, as median incomes have shown little growth in the post-recession period. Corporate investment has also been stubbornly slow to recover, another drag on imports.

“That says something about the prospects for growth” in the rest of the world, she said. If other countries are waiting for U.S. import demand to lift their economies, she said, “we’re not there for them.”

Source: David Parkinson – The Globe & Mail