Loonie Rallies After BOC Holds Rates Steady
DailyFX.com -
Talking Points:
- Bank of Canada holds the benchmark rate at 0.50% largely because of labor market slack.
- BOC raises GDP forecast in the near-term in April Monetary Policy Report.
- BOC expects inflation to decline in the coming quarters.
- Canadian Dollar falls rallies against the US Dollar breaking below February high.
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The Bank of Canada decided to leave the overnight benchmark interest rate unchanged at 0.50%, as was widely expected by market participants; as with last month, none of the 22 economists surveyed by Bloomberg News called for a rate move. The BOC cited that there is “material slack” in the Canadian labor market unlike other advanced economies, such as the US, which is close to full employment. The BOC states that gains in hours worked is still “soft” despite “robust” employment data.
Potential Growth
Notably, the BOC raised their short-term gross domestic product (GDP) forecasts. The central bank now sees 1Q (GDP) at 3.8% versus 2.5% previously and 2.6% in 2017 from 2.1% previously. Meanwhile, the Bank has lowered their long-term projection of potential growth pointing to “persistently weak investment.” The Bank believes that an increase in economic activity combined with a decrease in potential will lead to the output gap closing in the first half of 2018.
Inflation
The Central Bank has revised their consumer price index (CPI) inflation target to 2% in 2018 due to the transitory effects of higher oil prices. Although, they acknowledge that these factors are temporary and other measures of core inflation are on a downtrend. In the coming months, the BOC expects CPI to decline due to a combination of persistent slack and subdued wage growth in the labor market.
Ultimately, for the reasons mentioned, the Bank’s Governing Council decided it was appropriate to maintain the overnight rate at 0.50%.
With a weak economic outlook, the BOC may not be prepared to tighten monetary policy in the near future. This poses a risk that they may fall behind the Federal Reserve Bank as they continue to remove monetary policy accommodation.
Here’s a summary of recent Canadian economic figures:
- CAD Teranet/National Bank HPI (MoM) (MAR): 0.9% actual versus 1.0% previous.
- CAD Teranet/National Bank HP Index (MAR): 204.05 actual versus 202.25 previous.
- CAD Teranet/National Bank HPI (YoY) (MAR): 13.5% actual versus 13.4% previous.
- CAD Bank of Canada Rate Decision (APR 12): 0.50% as expected
Chart 1: USD/CAD 4-hour Chart (April 12, 2017 Intraday)
Immediately following the data there was a bullish reaction on the Canadian Dollar as it broke below the February high at 1.3283 against the US Dollar. At the time this report was written, the pair was trading at 1.3268.
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