It comes as little surprise that the Bank of Canada has maintained its target for the overnight rate at 1.0%. The key interest rate has remained the same for 12 consecutive decisions—since September 8, 2010, when it was increased from 0.75% to 1.0%.
Despite holding the rate steady, the Bank’s governor, Mark Carney, issued somewhat of a surprise in his corresponding statement by subtly implying the target may be increased sooner than previously expected by several economists.
In discussing the Bank’s view on the global economy, Mr. Carney said the uncertain outlook present in January (when the last Monetary Policy Report was released) had subsided, due to a variety of factors including improved signals surrounding the European debt crisis, improvements in the U.S. labour market providing support for moderate economic expansion, and a reduction in risk aversion amongst global investors. Mr. Carney also noted that downside risks remain prevalent as fiscal contraction continues amongst developed economies; growth in emerging markets, specifically China, slows; and commodity prices are subjected to rapid appreciation as a result of heightened geo-political tensions.
The Bank’s overview of the global economy presents a balanced rationale for maintaining the rate of 1.0%; however, as monetary policy stimulus is close to an historic high, recent economic improvements could provide the impetus for an increase.
Gross Domestic Product (GDP)
Canada’s central bank continues to expect that domestic spending will drive the Canadian economy. In particular, continued access to cheap financing is likely to assist households in maintaining existing spending growth and pushing debt levels beyond their current, all-time high. Although not mentioned in the Bank’s statement, elevated commodity prices and ongoing access to affordable credit can be expected to contribute to strength in business spending.
Strength in domestic spending is expected to be offset by moderate foreign demand and the persistent strength of the Canadian dollar—which together make it difficult for Canadian exports to compete in the global market.
In January’s Monetary Policy Report (MPR), the Bank stated that headline inflation, as well as core inflation, would moderate in 2012 and subsequently increase to the 2.0% target by Q3-2013.
Today’s announcement is not fundamentally different from the latest MPR, however, inflationary pressures are somewhat more elevated and are now expected to remain close to target for the foreseeable future.
The decision had an immediate impact on the Canadian currency, as the loonie increased by 42 basis points versus the USD from 8:56 a.m. to 9:07 a.m.
The next scheduled date for announcing the overnight rate target is April 17, 2012.
Bank of Canada press release: http://www.bankofcanada.ca/2012/03/press-releases/fad-press-release-2012-03-08/