BOC Extended the Longest Pause since Adoption of Overnight Rate

The BOC expectedly paused in January, keeping the overnight rate at 1% for an 11th consecutive meeting. While policymakers believed economic growth will be "more modest" than previously anticipated, they preferred to stand on the sideline for the time being as historically low interest rates and the well-functioning financial system have been providing stimulus to the economy. Yet, the central bank pledged to monitor the market situation carefully so that it could act swiftly with the aim of keeping inflation at the 2% target in the medium-term.

The central bank acknowledged that the global economic outlook has "deteriorated" and uncertainty has "increased" since the last quarterly MPR. Problems in the Eurozone and the US remained the focal point. For the former, the sovereign debt crisis has intensified and economic recession in the region will probably be deeper and longer than previous forecasts. The BOC expected that "European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks". For the latter, despite significantly improved economic data in the second half of last year, the pace of recovery in the US will be more modest as driven "ongoing household deleveraging, fiscal consolidation and the spillovers from Europe". Concerning China, the world’s second largest economy, growth will decelerate but the pace would be "more sustainable".

Domestic outlook has also been changed from the central bank’s previous forecast. According to the statement, "while the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be "more modest", owing to the situation that "prolonged uncertainty about the global economic and financial environment" will probably "dampen the rate of growth of business investment". Inflation outlook is more or less stable. "Total and core inflation are expected to moderate in 2012 and subsequently rise", reaching 2% 3Q13. Yet, "significant upside and downside risks are present in the inflation outlook for Canada".

Canadian dollar climbed further after the announcement. Regarding the strength of the currency, the BOC warned that "persistent strength" of Canadian dollar would restrain growth. As mentioned in the statement, "net exports are expected to contribute little to growth, reflecting moderate foreign demand and ongoing competitiveness challenges".