As generally expected, the BoC left key interest rates on hold today. The benchmark overnight rate stays at 0.50 percent, between the 0.25 percent deposit rate and 0.75 percent Bank Rate.
However, the tone of the accompanying explanatory text was moderately dovish, emphasising downside risks to the global economy while at the same time again attributing persistently firm domestic core inflation (the BoC's CPI gauge edged up to a 2.4 percent annual rate in July) to the effects of the C$'s depreciation and other one-off factors.
In fact, the risks of another cut today would probably have been significantly higher but for the surprisingly sharp 0.5 percent monthly rebound in economic activity in June. This was the first growth of any kind since December 2014 and strong enough to provide the current quarter with acquired annualised growth of 1.1 percent. However, although third quarter GDP now looks all the more likely to see the end of the recession, a strong, let alone sustainable, recovery is far from assured.
To this end, policy should continue operate with a slightly dovish bias at least until the anticipated upswing becomes more fully established.
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.
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