October's policy announcement contained no surprises. Key interest rates were left unchanged so the target overnight rate stays pegged at 0.5 percent, in the middle of the range set by the deposit rate (0.25 percent) and Bank Rate (0.75 percent).
Justification for maintaining the status quo was provided in the Bank's new Monetary Policy Report (MPR). This shows a still cautious recovery in economic growth, with an upward revision to last quarter (now 2.5 percent saar) effectively offset by a downward adjustment to the current quarter (now 1.5 percent). The economy is expected to expand a modest 2 percent next year and there is no return to full capacity until mid-2017 (See calendar MPR entry).
Overall, the tone of the accompanying statement was quite balanced, in line with the bank's assessment of risks to its new inflation profile. As such it should do little to bolster (currently limited) expectations for another cut in interest rates further out.
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.