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The Bank of Canada left the overnight rate at 0.25% this morning and maintained their assessment of the risks to the outlook as being balanced based on macro considerations. The Bank removed the statement about risks being "tilted slightly to the downside" because policy is operating at the effective lower bound and did not allude to its ability to use alternative measures to provide additional easing when the policy rate is at the effective lower band. However, the central bank did reiterate its conditional commitment to keep the policy rate at its current level "until the end of the second quarter of 2010" in order to ensure that inflation stays on course to meet the medium-term target.
The Bank acknowledged that the economy was "slightly" stronger than expected in the fourth quarter although reiterated that the "persistent" strength in the Canadian dollar and weak US demand continue to provide downside risks the Canada's recovery going forward. On the other hand, the Bank cited "vigorous" domestic spending and rebounding exports as providing support to the economy in the final quarter of last year. The Bank pointed to stronger than expected global and domestic demand as providing upside risks to the outlook.
On inflation, the Bank highlighted that the core rate "has been slightly firmer than projected" pointing to both transitory factors and the faster pace of economic growth. Going forward, the Bank presented upside and downside factors for the inflation outlook citing both the strength in domestic demand as well as the abundant slack in the economy and weakening wage growth.
Two key changes were made to the statement that indicate that the Bank is edging its way toward removing the extraordinary level of monetary policy stimulus. The Bank removed the statement that the overall risks to the outlook are "tilted slightly to the downside" as a result of policy operating at the lower bound. As well, the Bank did not repeat that they retain "considerable flexibility" in the conduct of policy at lower rates suggesting that the need for additional easing of policy has become increasingly unlikely. The stronger-than-expected report on the fourth quarter and improved labour market are consistent with a gradual removal of the accommodation being supplied to the economy. The winding down of its liquidity support programs is already in train and the first step toward this occurring. We expect Canada's economy will grow at an average 3.6% pace in the first half of 2010 although the large output gap generated during the recession means that the core inflation rate will remain below the Bank's 2% target until late 2011. This will allow the Bank to proceed slowly with rate increases in order to ensure that the economy's positive momentum is not disturbed. We expect the Bank to increase the overnight rate by 100 basis points in the second half of the year as they begin the process of adjusting monetary policy toward a more neutral stance.
Details
• Bank of Canada left unchanged the overnight rate at 0.25% and maintained its conditional commitment to this rate through the end of the second quarter of 2010
• Bank removes the statements that suggest more accommodation may be needed
• Statement tees up for Bank to remove stimulus this summer if economy improves as we project.
The Bank acknowledged that the economy was "slightly" stronger than expected in the fourth quarter although reiterated that the "persistent" strength in the Canadian dollar and weak US demand continue to provide downside risks the Canada's recovery going forward. On the other hand, the Bank cited "vigorous" domestic spending and rebounding exports as providing support to the economy in the final quarter of last year. The Bank pointed to stronger than expected global and domestic demand as providing upside risks to the outlook.
On inflation, the Bank highlighted that the core rate "has been slightly firmer than projected" pointing to both transitory factors and the faster pace of economic growth. Going forward, the Bank presented upside and downside factors for the inflation outlook citing both the strength in domestic demand as well as the abundant slack in the economy and weakening wage growth.
Two key changes were made to the statement that indicate that the Bank is edging its way toward removing the extraordinary level of monetary policy stimulus. The Bank removed the statement that the overall risks to the outlook are "tilted slightly to the downside" as a result of policy operating at the lower bound. As well, the Bank did not repeat that they retain "considerable flexibility" in the conduct of policy at lower rates suggesting that the need for additional easing of policy has become increasingly unlikely. The stronger-than-expected report on the fourth quarter and improved labour market are consistent with a gradual removal of the accommodation being supplied to the economy. The winding down of its liquidity support programs is already in train and the first step toward this occurring. We expect Canada's economy will grow at an average 3.6% pace in the first half of 2010 although the large output gap generated during the recession means that the core inflation rate will remain below the Bank's 2% target until late 2011. This will allow the Bank to proceed slowly with rate increases in order to ensure that the economy's positive momentum is not disturbed. We expect the Bank to increase the overnight rate by 100 basis points in the second half of the year as they begin the process of adjusting monetary policy toward a more neutral stance.
Details
• Bank of Canada left unchanged the overnight rate at 0.25% and maintained its conditional commitment to this rate through the end of the second quarter of 2010
• Bank removes the statements that suggest more accommodation may be needed
• Statement tees up for Bank to remove stimulus this summer if economy improves as we project.
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