The BoC announced no changes to benchmark interest rates today. Accordingly, the target for the overnight rate stays at 0.75 percent while the Bank Rate and deposit rate are held at 1.0 percent and 0.5 percent respectively. Despite many analysts anticipating a fresh cut in rates later in the year, the decision not to move today was not a surprise.
Maintaining the policy status quo reflects the Bank's view that, despite some changes to the quarterly forecast profile (see new MPR entry) the output gap is still seen remaining negative for some while yet. Hence, forecast annual growth of 1.9 percent in calendar 2015 is only a couple of ticks short of the January projection and a 2.5 percent rate in 2016 is 0.1 percentage points above last time.
Headline inflation (forecast 0.8 percent in Q1) is expected to climb to meet its 2 percent target midpoint by the first quarter of 2016, and so sooner than previously anticipated but to hold at that level thereafter. Core inflation is expected to be essentially flat at 2.0-2.1 percent throughout the forecast horizon.
If anything, the revised forecasts are rather more bullish than generally anticipated and may dampen somewhat speculation about another rate cut. That said, the forecasts are heavily contingent upon a strong U.S. recovery, a firm export performance and a solid rebound in investment. None of this is certain. Risks to the outlook are seen as reasonably balanced which suggests no real policy bias going forwards but this clearly does not preclude additional monetary easing. Indeed, a poor second quarter and/or rebound in the local currency could be enough to trigger just that.
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.