CA: Bank of Canada Announcement

Wed May 24 09:00:00 CDT 2017

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 0.5% 0.5% 0.5%

As expected, the Bank of Canada (BoC) left its policy interest rate unchanged at 0.5 percent saying that it was "appropriate at present". The Bank Rate is correspondingly 0.75 percent and the deposit rate is 0.25 percent. While economic data has turned more positive recently, the data follow a prolonged period of weakness triggered by the decline in oil prices. The BoC's inflation target is 2 percent with a control range of 1 percent to 3 percent. Annual inflation is currently 1.6 percent, below the midpoint. Moreover, administrative measures aimed to stem house price inflation are starting take effect and this could also add downward pressure to inflation. There is no press conference today, only a brief statement.

According to its statement, the BoC said that inflation is broadly in line with the Bank's projection in its April Monetary Policy Report (MPR). Food prices are declining mainly because of intense retail competition. The Bank's measures of core inflation remain below two percent and wage growth is still subdued, consistent with ongoing excess capacity in the economy.

The BoC said that the economy's adjustment to lower oil prices" is largely complete and recent economic data have been encouraging, including indicators of business investment." It also said that consumer spending and the housing sector continue to be robust thanks to an improving labour market, and these are becoming more broadly based across regions. However, it said that export growth remained subdued as anticipated in the April MPR. Economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.

The BoC sees the global economy gaining traction and believes that "growth will gradually strengthen and broaden over the projection horizon."

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

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.