Canada: Bank of Canada leaves policy rate unchanged in December
December 2, 2015
At its 2 December monetary policy meeting, the last of the year, the Bank of Canada (BoC) decided to leave the overnight rate unchanged at 0.50 as market analysts had expected. The decision followed the third quarter release of national accounts data, which indicated that Canada had returned to growth after having been mired in a recession for the first half of the year. However, the strong figure was mostly due to export-oriented manufacturing industries and other exchange-rate-sensitive industries. The nascent recovery in such industries is a positive development although it puts pressure on the BoC to keep rates low in order to avoid compromising the fragile recovery.
In its accompanying statement, the Bank elaborated that the economy was evolving in accordance with the path forecast in its October Monetary Policy Report. Externally, demand from the U.S. continues to expand, while commodity prices have fallen further, spelling upside risks to manufacturing while clouding the outlook for the struggling commodities sector. The expected monetary policy tightening in the U.S. will impact Canada’s exchange rate dynamics going forward, and policy divergence will likely be relevant factor in upcoming policy meetings.
The BoC stated that the evolution of the domestic economy has been in line with October’s forecasts and noted that a weaker currency, a robust recovery in the U.S. and expansionary monetary policy are conflating to aid in the rebalancing of the domestic economy away from a heavier dependence on commodities, particularly energy. The collapse in energy prices last year is still being felt via cuts in spending related to Canada’s resource sector, particularly in terms of private investment. The energy sector has also suffered a substantial number of job losses; however, on a national level, the labor market remains robust.
Inflation has also evolved broadly in line with the BoC’s October Monetary Policy Report, hovering near the bottom of the BoC’s target range of 2.0% plus/minus 1.0%. Core inflation has been much closer to the target and has been stable at rates between 2.1% and 2.4% since August of last year as pass–through effects from the lower Canadian dollar have offset the downward pressure on prices stemming from excess capacity in the economy.
Inflation is expected to climb as predicted by the BoC, and therefore the Bank feels that its current monetary policy stance is appropriate. The Bank stated that, “taking all of these developments into consideration, the Bank judges that the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate.” The next policy meeting is scheduled for 20 January.
Author: Robert Hill, Economist