CA: Bank of Canada Announcement

Wed May 27 09:00:00 CDT 2015

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

As widely expected, the BoC announced no changes to key interest rates at its May policy-setting meeting. The target for the benchmark overnight rate remains at 0.75 percent while the deposit rate and Bank Rate stay pegged at 0.5 percent and 1.0 percent respectively.

Justifying its decision to maintain the status quo the central bank pointed out that inflation is evolving in line with its April MPR forecast and that the current undershoot of the headline CPI and undershoot of the core index are simply due to temporary factors. Accordingly the BoC noted no material changes to inflation risks. The real economy was also seen as being on track but there were a few warning noises about the potential effects of the recent partial recovery in the C$ and back-up in bond yields.

Recent economic news had already helped to cement market expectations that the monetary authority would not tighten until probably well into 2016. Today's BoC statement will not have impacted this view. This could change should Friday's first quarter national accounts prove much stronger than anticipated but otherwise it would seem that policy could stay on hold for some considerable time yet.

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.