There were no surprises from today's BoC meeting which left key interest rates unchanged while at the same time retaining a neutral policy bias. The target for the benchmark overnight rate duly stays at 0.50 percent, 25 basis points above the deposit rate and 25 basis points below Bank Rate.
The decision acknowledged signs of a stronger than expected domestic economic recovery so far this year and this was reflected in a significant upward revision to the central bank's near-term growth forecast (see the Monetary Policy Report calendar entry). Even so, but for last month's fiscal boost from the Liberals first Budget, increased concerns about global developments, notably a downgrade to the U.S. outlook, would have prompted a more cautious assessment of the Canadian picture. As it is, real GDP is now seen expanding 1.7 percent this year, up from the 1.4 percent call made in January, and 2.3 percent in 2017.
Inflation remains something of a non-issue with volatility in both the headline and, to a lesser extent, core rates still attributed to one-off factors and recent developments anyway seen in line with the Bank's own expectations.
With real GDP growth seemingly on course for something close to 2 percent (saar), if not more, last quarter the BoC must be cautiously happy with the way in which the economy is adjusting to the collapse in oil prices. Still, the global picture remains uncertain and a near-14 percent appreciation in the local currency versus its U.S. neighbour since its mid-January trough will hardly help exporters. For now at least, there is little pressure on the BoC to do anything and a 0.5 percent overnight rate target at year-end still looks the best bet.
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.