Predictably, the BoC has become more notably cautious about the economic outlook since its last Monetary Policy Report (MPR) in October. Slower forecast growth means that full capacity is not reached until the end of 2016, somewhat later than previously expected and, as a result, inflationary pressures have been similarly marked down. The implications are that the BoC's recent dovish stance has been vindicated and, having already reduced key interest rates today, the central bank could do so again later in the year.
Real GDP is now seen expanding at an annualised rate of just 1.5 percent this quarter after an estimated 2.5 percent rate at the end of 2014. Comparable forecasts made in October were 2.4 percent and 2.5 percent respectively. Over the rest of 2015 the economy is projected to accelerate towards a 2.5 percent year-end rate but the output gap, which is seen widening near-term, closes more slowly than previously envisioned.
Inevitably, the plunge in oil prices has had a major impact on the near-term inflation profile. The headline CPI is put at an annual rate of just 0.5 percent this quarter and 0.3 percent in the next, a cumulative 2.2 percentage points below the October call. The core rate holds up better but after the current quarter, stays below 2 percent until the fourth quarter of 2016.
There are no real surprises in the January MPR so today's BoC interest rate cut emphasises the importance of the energy sector to monetary policymaking. Financial markets will take note and keep an even more wary eye on oil price developments over coming months.
The Monetary Policy Report is a quarterly report of the Bank of Canada's Governing Council. It presents the Bank's base-case projection for inflation and growth in the Canadian economy, and its assessment of risks. In July, 2009, the BoC began publishing four quarterly reports. This enables the Bank to provide the full context surrounding its views on the economy each quarter and provides a more consistent format for the publication.
Each quarter, the MPR gives the financial markets a view of the BoC's governing council thinking. This provides important guidance especially since the BoC does not publish minutes from its policy setting meetings. The report is released at the same time as the policy announcement is made.
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