CA: Bank of Canada Announcement

Wed Mar 04 09:00:00 CST 2015

Consensus Actual Previous
Change 0bp 0bp -25bp
Level 0.75% 0.75% 0.75%

Amidst some speculation about a second successive cut, the BoC's March monetary policy meeting left key interest rates unchanged. Accordingly, the target for the overnight rate stays at the 0.75 percent mark to which it was lowered at the previous deliberations in January and the deposit rate and Bank Rate remain at 0.5 percent and 1.0 percent respectively.

The unexpectedly rapid speed with which the central bank responded to tumbling energy prices at the start of the year meant that financial markets would not have been especially surprised had another 25 basis point ease been delivered today. However, comments from Governor Poloz just last week intimated that while benchmark rates could well go lower at some point, more time was needed to assess the effects of the January move.

Explaining today's decision the central bank pointed to recent economic developments at home and abroad essentially matching its own expectations. Moreover, while still looking for the bulk of the negative impact on Canadian GDP of weaker energy prices to filter through over the first half of the year, risks around the anticipated inflation profile are now judged to be more evenly balanced. That said, the sharp rise in oil price volatility has necessarily heightened uncertainty about the economic outlook and the BoC is clearly willing to adjust its stance as deemed necessary over coming months and quarters.

The central bank of Canada announces its monetary policy with regard to interest rates about eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be.

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.