There were no changes to key interest rates at today's BoC announcement. The benchmark overnight rate stays at 0.50 percent, in the middle of the corridor described by the deposit rate (0.25 percent) and the Bank Rate (0.75 percent).
The unchanged stance was widely anticipated in the wake of a string of data that have suggested that the central bank's economic assessment is holding up pretty well. This is reflected in the new Monetary Policy Report (MPR, see calendar entry) where the updated forecasts show no significant change from the October edition.
In fact, in general the central bank seems quite happy in the way in which the domestic economy is performing and, on current trends, policy could well remain on hold for some considerable while yet. Certainly, the BoC has offered little indication of being in any hurry to tighten. Indeed, today's announcement noted that the economy still has material excess capacity that is not expected to be removed until the middle of 2018.
Friday's inflation data look set to show a largely energy-induced spike in the annual headline inflation rate but the core measures should remain well below the 2 percent mark. Such an outturn would be consistent with a broadly flat profile to short-term interest rates over at least the near-term, notwithstanding any possible further tightening from the Fed.
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.