Bank of Canada maintained tightening bias and overnight rate at 1.0%

The Bank of Canada left the overnight rate at 1.00% at its meeting today as was universally expected. More notable was the maintenance of the mild tightening bias that had been in place since April 2012.

The details of the Bank's quarterly growth projections will be released tomorrow; however, the statement indicates that consumption and business investment are still expected to be the drivers of growth with housing activity forecasted to decline.

The Bank notes that its forecast assumes that household debt will "rise further before stabilizing." The export sector will struggle against the headwinds coming from outside the country and challenges presented by the strong currency.

On the global front, the Bank sees the US economy as growing "at a gradual pace," and although China and other emerging nations' growth has slowed more that the Bank expected, today's statement highlights that these economies are showing signs of stabilizing.

 

Europe is the one area that the Bank sees as continuing to contract. Despite the tepid growth backdrop, the Bank notes that commodity prices have risen in recent months and that financial conditions have improved.

Our monitoring of the Canadian economy points to real GDP growth of 2.0% at an annualized rate in the third quarter of 2012, which is little changed from the 1.8% and 1.9% recorded in the first and second quarters of 2012, respectively. The details of Bank's growth profile will be released in tomorrow's Monetary Policy Report.

 

The upping of the 2012 forecast to 2.2% from 2.1% is likely the result of a combination of incorporating the revisions made to growth in late 2011 with limited changes to the forecasts for the growth in the second half of 2012. The Bank maintained the 2.3% forecast for 2013 and inched lower the 2014 growth forecast to 2.4% from 2.5%.

 

The Bank now anticipates the output gap will close by the end of 2013, slightly later than the previous forecast that the gap would close in the second half of 2013, with the inflation rate returning to the 2% target about one quarter later from what we can tell from today's statement.

 

The reason behind the later closing of the gap will be also be of interest and contained in tomorrow's Monetary Policy Report as the report will show if this reflects a larger gap currently or reflects an upgrading of the Bank's estimate of the economy's potential growth rate.

Today's statement indicates that the Bank sees the domestic economy as continuing along a moderate growth path supported by stimulative financial conditions and elevated prices for commodities produced in Canada.

 

The worrisome tone contained in Governor Carney's speech last week did not translate into a material change in the forecast for the economy or forward guidance regarding monetary policy as was expected by markets. Canada's domestic economy is expected to remain its stronghold with export growth restrained by the strong Canadian dollar and weak global demand.

 

The Bank acknowledged that inflation has been running lower than anticipated although still expects both the headline and core rates to reach the 2% target in mid-to-late 2013. Today's statement also highlighted that the Bank will be watching not only global developments but also is monitoring keenly the "imbalances in the household sector."

 

To that end, the statement still supports our expectation that the Bank will reduce the amount of policy stimulus once the risks to the global outlook have eased sufficiently with a hike still likely in mid-2013