CA: Bank of Canada Announcement

Wed Jul 15 09:00:00 CDT 2015

Consensus Actual Previous
Change -25bp -25bp 0bp
Level 0.50% 0.50% 0.75%

In line with the majority call the BoC today opted to cut key interest rates by a further 25 basis points. The target for the key overnight rate now stands at 0.50 percent while the deposit rate is lowered to 0.25 percent and the Bank Rate to 0.75 percent.

The second 25 basis point cut this year reflected a significant downgrading of the BoC's near-term growth projections, itself attributable to an unexpectedly large negative impact from the collapse in oil prices as well as weaker other non-energy commodity and non-commodity prices (see calendar MPR entry). In April the central bank's forecast for second quarter GDP growth was 1.8 percent (saar) but this has now been slashed to minus 0.5 percent, effectively putting the economy into recession.

January's 25 basis point cut was supposed to pre-empt the main effects of the oil price slump but in practice industry was hit unexpectedly hard. Today's follow-up move should quash talk of any further easing for the time being but the willingness of the BoC to act now will ensure financial markets continue to follow the economic data very closely. Another poor quarter in the July-September period and rates could yet be heading south again. Such a possibility should keep the local currency under downside pressure, especially with oil prices again looking vulnerable in the wake of the new nuclear deal between the West and Iran.

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.