Bank of Canada Maintains Rate at One Percent – Targeting a Balance of Risks

December 9, 2014

The Bank of Canada maintained its target for the overnight lending rate at 1.0%. MD’s perspective on capital market performance is unchanged. We continue to expect modest acceleration for Canada’s economic growth and ongoing policy support from Canada’s central bank.

In the latest announcement, Bank Governor Dr. Stephen S. Poloz noted the acceleration in U.S. economic activity and highlighted that growth in the rest of world continues to face headwinds, despite prominent stimulus from policy makers like the Bank of Japan.

The Bank explained that underlying inflation in Canada remains moderate, with recent oil price weakness presenting additional downside, and elevated consumer debt levels continuing to threaten financial stability.

Gross Domestic Product (GDP)

Following progress in the U.S. economy and a weaker Canadian dollar, the Bank of Canada noted improvements to Canada’s exports and business investment. Both of these factors continue to be viewed as critical for sustainable domestic expansion amid more limited support from consumer and government spending; however, with the federal budget balanced and funding costs expected to remain low, additional tax cuts and benefits have been announced.

Inflation

The Bank said both core inflation, at 2.3%, and headline inflation, at 2.4%, were above its target level in the 12 months through October 2014. However, it sees each as transitory due to the combined impact from a weaker Canadian dollar, as well as higher food and telecommunications costs.

Looking forward, the decline of oil prices is expected to reduce energy costs. And perhaps more important for future policy decisions, wage price inflation remains subdued despite Canada’s unemployment rate declining to 6.5% through October 2014. On balance, noted inflation remains within the Bank’s 1% to 3% tolerance band and underlying pressure continues to be moderate.

Next announcement

The next interest rate announcement is scheduled for January 21, 2015. This will also include the Bank of Canada’s Monetary Policy Report.

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