ActionForex.com
Apr 17 15:32 GMT

Sponsors

Forex Expos

Bank of Canada Says Rates to Stay Low "for a Period of Time" But Eventual Withdrawal of Stimulus Still in the Cards Print E-mail
Daily Forex Fundamentals | Written by RBC Financial Group | Mar 06 13 16:43 GMT

Bank of Canada Says Rates to Stay Low "for a Period of Time" But Eventual Withdrawal of Stimulus Still in the Cards

  • Bank of Canada left the overnight rate unchanged at 1.00% as expected.
  • Tweaks forward-looking guidance again: rates to stay low for "a period of time" then "some modest withdrawal of stimulus" likely to be required.
  • Today's statement supports our view that the Bank will maintain the overnight rate at 1.00% in 2013.

The Bank of Canada left the overnight rate unchanged at 1.00% at today's meeting and, although it altered the language in the forward-looking statement, maintained the directive that policy stimulus will be withdrawn in time. The statement now reads that "the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required." This follows January's statement that any removal of monetary policy stimulus had become "less imminent."

The tone in today's statement was similar to the January 2013 outlook and statement. In January, the Bank presented the below-trend increase in real GDP in the third quarter of 2012 as likely to be short term with the economy expected to pick up its pace in 2013. These views were reiterated in this morning's statement with the Bank characterizing the economy's slow fourth-quarter 2012 headline growth rate, which was released last week, as masking "solid growth across most domestic" sectors and due to the pullback in inventories. Once again, the Bank stated that the economy's growth rate is expected to "pick up through 2013."

On inflation, the Bank gave a nod to the weaker than expected core rate and attributed the weakness to "material excess capacity" and forecasted that the rate will increase to the 2% target "over the projection horizon," which hints that in the April forecast update, the Bank will revise its forecast to show that the inflation rates at 2% somewhat later than the third quarter of 2014 that was assumed in January's forecast.

The Bank made small tweaks to the global outlook and maintained the main themes that the US economy is growing "at a gradual pace," China's economy has improved, and Europe's recession is continuing.

The economy's disappointing performance in the fourth quarter of 2012 provided a poor handoff to 2013 especially given the deep declines recorded in the manufacturing and retail sectors in December. Early January data showed auto sales rebounding although housing starts sank and employment fell. It is likely that some of this weakening reflected concerns about what was happening in the US regarding the fiscal outlook with some speculating that the tax increases and spending cuts risked a severe growth slowdown. After incorporating the tax increases and spending cuts, our forecast is for the US economy to expand by 2.0% this year. Given the US housing recovery underway and increased demand for motor vehicles, even this half-hearted pace of growth should be enough to raise demand for Canadian exports. Canada's domestic economy is benefitting from very easy financial conditions, which we expect will keep both households and businesses spending. Today's statement indicates that the Bank of Canada agrees with our view that the economy will pick up pace during the course of the year thereby emphasizing that the weakness in the fourth quarter of 2012 largely emanated from inventories. Still, given the unexpected widening in the output gap and lower than expected inflation, the pressure, at least in the near term, is for the Bank to maintain policy support not remove it. Additionally, the persistent slowing in the pace of housing sales and credit growth are lessening the pressure on the Bank to raise interest rates. Today's statement underpins our view that the Bank will maintain the overnight rate at 1.00% this year.

 

About the Author

RBC Financial Group

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

Facebook MySpace Twitter Digg Delicious Google Bookmarks 

Analysis Reports

Central Bank Analysis
Economic Data Reviews
Technical Analysis

Forex Brokers

ActionForex.com © 2014 All rights reserved.