Bank of Canada Maintains "Conditional Commitment" to Hold Policy Rate at 0.25% until Mid-2010

As expected, the Bank of Canada left the target for the overnight rate at 25 basis points, the effective lower bound for the policy rate, and did not implement a quantitative easing program. Economic conditions and the outlook for inflation are generally unfolding as expected the Bank said and reiterated that they expect the recovery (both in Canada and abroad) to be "more muted than usual".

The Bank stuck to the notion of giving a conditional commitment to keep the policy rate at the lower bound until the middle of next year. On the currency, the Bank acknowledged that the rally was a reflection of the broad-based weakening in the U.S. dollar and the rise in commodity prices. Oil prices have more than doubled since falling to a near-term low in December.

On recent developments, the bank noted that there has been a "significant" improvement in financial conditions and commodity prices with confidence measures showing signs of recovery as well. Broad financial conditions, although still tighter on average than they have been during the past decade, have clearly eased with the Bank's Financial Condition Index off 310 basis points from its tightest point and 80 basis points from the Bank's last meeting.

Concern that the "unprecedentedly rapid rise in the Canadian dollar" will "prove persistent" and offset the positive impact of these other factors, was noted. Our assessment is that the Canadian dollar will likely give back some of its recent gains as the impact of the recent burst of risk appetite wanes and the U.S. dollar stages a modest recovery. Once again the Bank's assessment is that the risks to the inflation outlook remain "slightly to the downside". We are of the view that the Bank of Canada will keep to its current policy stance and only revert to implementing non-traditional measures if a serious threat to the economy recovering later this year materializes.

RBC Financial Group
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