Canadian Monetary Statement Less Dovish Than One Might Expect

The Bank of Canada left its overnight money target at 3.0%, passing up any temptation to ease further for a third straight meeting. A statement accompanying the decision did not reveal any bias toward easing further, even though economic growth in both the first quarter of minus 0.8% at a seasonally adjusted annual rate and in 2Q of only +0.3% saar were each weaker than expected. The statement reverted to June’s policy characterization of "appropriately accommodative" from July’s plain label of "appropriate." For the most part, the statement maintains that developments have gone along expected lines and that forecasts for growth and inflation remain more or less intact.

One significant development since the last meeting, which coincided with the day that oil prices peaked, has been the weaker-than-assumed trajectory of energy and other commodity prices and resultant drop in the Canadian dollar against its U.S. counterpart. Such has countervailing effects on Canadian growth and leaves the outlook roughly the same. Total CPI inflation will not spike as high in 2H08 as had been assumed in July, however. So the forecast for growth remains that GDP expands 1.0% in 2008, 2.3% in 2009 and 3.3% in 2010. With economic activity just slightly under Canada’s productive capacity, officials continue to project a convergence of headline and core CPI on the target of 2% around the middle of next year.

Just one note of fresh pessimism can be found in the statement, which otherwise proclaims that domestic demand, though modestly slower, "remains strong." That caution involves "the risk of a more pronounced interplay between weakness in the U.S. economy and tightness in credit conditions that could affect the U.S. outlook for 2009." For now, there does not seem to be any intention to cut Canadian rates again. Clues for a possible reconsideration of additional easing, it would seem, are more likely to arise in future U.S. than Canadian data trends.

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