CA: Bank of Canada Announcement


Wed Apr 18 09:00:00 CDT 2018

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 1.25% 1.25% 1.25%

Highlights
As pretty much expected, the Bank of Canada maintained its target for the overnight rate at 1¼ percent. The Bank Rate is correspondingly 1 1/2 percent and the deposit rate is 1 percent. The announcement was somewhat more hawkish than last time. The BoC continues to be data driven. While the Bank has raised rate three times since last summer, the markets have started reeling back expectations for further BoC tightening after the country recorded a sharper than expected slowdown during the fourth quarter and following a spate of mixed economic reading.

In its announcement, the BoC said that inflation is close to 2 percent. Consistent with an economy operating with little slack, core measures of inflation have continued to edge up and are all now close to 2 percent. The transitory impact of higher gasoline prices and recent minimum wage increases might cause 2018 inflation to be modestly higher than the Bank expected in its January Monetary Policy Report (MPR), returning to the 2 percent target for the rest of the projection horizon.

The BoC said that the global economy is on a modestly stronger track than forecast in January, with upward revisions to growth and potential output in a number of major advanced economies. The outlook for the U.S. economy has been further boosted by new government spending plans. However, escalating geopolitical and trade conflicts risk undermining the global expansion.

Canada's GDP growth in the first quarter was weaker than expected, but should rebound in the second quarter, resulting in 2 percent average growth in the first half of 2018. The Bank anticipates that Canadian exports will strengthen as foreign demand increases, but not sufficiently to recover the ground lost during recent quarters. Export growth is being increasingly limited by capacity constraints in some sectors.

Definition
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.

Description
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.