Canada Monetary Policy


Canada: Bank of Canada halts tightening cycle as expected

October 19, 2010

At its last meeting on 19 October, the Bank of Canada (BoC) decided to leave the target for the overnight rate unchanged at 1.00% in a decision widely expected by the market. Monetary authorities stated that this decision ?leaves considerable monetary stimulus in place? and is ?consistent with achieving the 2.0% inflation target?. The BoC began tightening its monetary policy stance in June. The BoC believes that the economic outlook for Canada has changed, as the output gap is currently larger than previously estimated, and with the economy returning to full capacity only by the end of 2012. Furthermore, inflation has been slightly below the Bank's July projection, which is consistent with ?significant excess supply and a deceleration in the growth of unit labour costs?. That said, the Bank stated that ?any further reduction in monetary policy stimulus would need to be carefully considered?, suggesting that no rate hikes are expected for the next meetings. On 20 October, the Bank also published its new Monetary Policy Report, with a full update of the Bank's outlook for economic activity and inflation for the next two years. Meanwhile, the next monetary policy meeting is scheduled for 7 December. Against this backdrop, a majority of Consensus Forecast panellists expect the Bank of Canada to leave the policy rate unchanged at the current 1.00% by end-2010, resulting in a Consensus average of 1.08%. In 2011, the policy rate is expected to end the year at an average rate of 2.22%.

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