CA: Bank of Canada Announcement

Highlights

As widely expected, the Bank of Canada maintained its key policy rate unchanged at 2.25 percent, but adopted a more hawkish tone as it stressed that"With the Middle East conflict still ongoing and little progress reopening the Strait of Hormuz, upside risks to the Bank’s inflation forecast have increased."

Unlike in July, the policy statement no longer mentions that the current policy rate is appropriate.

Against the backdrop of escalating trade tensions with the U.S., Governor Tiff Macklem added that"New U.S. tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time."

Still, the BoC"will be a source of stability," Macklem asserted, adding that central banks' tolerance for high inflation"is limited."

Overall, the central bank repeated it"is prepared to adjust monetary policy as needed", although Macklem reminded that monetary policy is a blunt instrument that cannot"offset the effects of tariffs or influence global energy prices". Instead,"What we can do is ensure global developments don’t jeopardize price stability in Canada."

On the growth front,"new tariffs make growth prospects more uncertain," the central bank said. However,"we don’t expect them to have a large direct impact on the overall level of economic activity".

On Aug. 22, Canada called off trade negotiations with the U.S., which responded by imposing 50 percent tariffs on around $28 billion worth of Canadian exports. Canada is retaliating with dollar-for-dollar tariffs ranging from 15 percent to 50 percent targeting nearly $28B in U.S. imports, scheduled to come into force Sept. 8. The Canadian government will also support businesses and workers.

Up until now, both growth and inflation have evolved roughly as expected, the BoC assesses. GDP growth rebounded at an annualized pace of 3.3 percent in the second quarter, putting the Canadian economy"on a stronger footing" to face challenges. That being said, the central bank"will assess the sustainability of the economic rebound and the outlook for inflation".

The inflation rate rose to 3.0 percent in July from 2.8 percent in June, although core prices are around the 2.0 percent target. The BoC attributes the above-target inflation to"persistently higher gasoline prices" and sees"little evidence of higher energy prices spreading to other components of inflation".

Still,"The longer that high oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services," the policy statement said. Macklem added that at 3.0 percent, inflation is"too high".

Asked about higher bond yields in the U.S. and global yields, Macklem cited high sovereign debt globally and continued strong issuance. He also mentioned the build-out of AI infrastructure leading to more financing needs from corporations, raising their need to issue bonds. Meanwhile, there is no resolution in sight for the Middle East conflict, which keeps energy prices high. While"we are seeing some spillover" to Canadian yields, the yield curve is"well below" the U.S. curve, he said, notong in paryicular the weaker economy and stronger fiscal situation.

Market Consensus Before Announcement

The BOC is expected on hold again.

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.

Recommended for you

Upcoming Events