Bank of Canada Holds Rate Steady at 0.75%

Economy evolving as expected, central bank's oil price assumptions still valid
March 4, 2015 Updated: March 4, 2015

OTTAWA—The Bank of Canada left the overnight rate target at 0.75 percent on Wednesday as it noted that the negative effects of the oil price shock are being mitigated by lower interest rates and currency after the Jan. 21 rate cut.

The broad message is one of steady as she goes. The Canadian economy is evolving according to expectations set out on Jan. 21 when the Bank released its economic projections in its monetary policy report.

“At present, we judge that the current degree of monetary policy stimulus is still appropriate,” said the Bank of Canada in its statement.

The loonie, which was trading just below US$0.80 prior to the announcement at 10 a.m., pushed above that level and the two-year bond yield moved higher by almost 0.15 percent (15 basis points) reflecting the less dovish statement.

Economic data has generally been stronger since Jan. 21 and the price of oil seems to have found some stability with West Texas Intermediate trading around US$50 a barrel and Brent trading around US$60 a barrel—close to the central bank’s assumptions.

On Tuesday, March 3, Statistics Canada reported that GDP grew at a 2.4 percent annualized rate in the last quarter of 2014. This was better than what analysts expected (2.0 percent), and is basically in line with the 2.5 percent forecast by the central bank on Jan. 21.

At present, we judge that the current degree of monetary policy stimulus is still appropriate.
— Bank of Canada

The latest figures released Feb. 26 show core consumer prices steady at 2.2 percent. “The risks around the inflation profile are now more balanced,” the Bank stated. The lower loonie has given a boost to inflation as imported goods became more expensive.

January’s employment report looked strong, with over 35,000 jobs created and the unemployment rate falling to 6.6 percent. But as Senior Deputy Governor Carolyn Wilkins pointed out in her Feb. 10 speech, beneath the surface lie various problems.

Governor Stephen Poloz’s comments in his speech at Western University last week summed up the Bank’s stance in the lead-up to the rate decision. His comment that the Jan. 21 rate cut “buys us some time to see how the economy actually responds” suggests that with the improvement in GDP and inflation, a rate cut was not in the cards.

The Bank surprised everyone with the rate cut on Jan. 21 and now seems to want to avoid surprising markets going forward. Market-implied expectations for a rate cut to 0.50 percent were significantly reduced after Poloz’s speech.

The Bank sounded optimistic in that, despite having the effects of the oil price shock mostly affecting the first half of 2015, last year’s data suggests the economy is rotating into stronger growth in non-energy exports and investment.

Globally, the U.S. continues to be the economic bright light. Other central banks have taken steps to ease monetary policy and boost demand, which help Canada’s non-energy exports.

The Bank of Canada’s next interest rate announcement date is April 15. It will also release the next set of quarterly projections in the next MPR on that date.

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Follow Rahul on Twitter: @RV_ETBiz