CAD Catches A Breather as Bank of Canada Leaves Rates Unchanged

Jan. 20, 2016 (Econoday) – The Bank of Canada opted to leave key interest rates unchanged at today’s monetary policy announcement. The target for the benchmark overnight rate stays at 0.5 percent, at least until the bank’s next meeting in March.

On balance financial markets were just about looking for a 25 basis point cut but it was always going to be a very close call.

The decision not to pull the trigger on rates just yet is unlikely to have been taken easily. As the central bank’s newly updated Monetary Policy Report (MPR) makes clear, the BoC has become more cautious about economic recovery at home, even if it notes few surprises in global activity. Hence, real GDP growth is now put at only 1 ½ percent this year, down from the 2 percent call made in October. The 2017 forecast is unchanged at 2 ½ percent.

Inflation (all but inevitably) is shown at near-2 percent (the target mid-point) by the end of the projection horizon after following a volatile profile due to base effects caused by the instability of the energy markets. Core inflation is expected to hold close to 2 percent throughout the projection period. However, the new MPR acknowledges increasing excess capacity through 2015 alongside an absence of wages pressures. If so, unless the effects of C$ depreciation feed through significantly, the risk is that inflation undershoots official expectations.

Still, the overall impression is that the BoC is not in any great hurry to cut rates again and this may give the beleaguered C$ a temporary reprieve. Nonetheless, today’s decision to maintain the policy status quo is unlikely to prevent speculation about a cut moving to the next meeting on 9th March. If so, any bounce in the local currency will likely be seen as a fresh selling opportunity unless oil prices manage a surprising and sustainable rebound.

 


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