Wednesday, July 16, 2014

Bank of Canada Interest Rate Announcement - July 16, 2014


The Bank of Canada announced this morning it was once again holding its target for the overnight rate at 1 per cent.  In the statement accompanying its decision, the Bank highlighted that while total CPI inflation has risen close to its 2 per cent target in recent months, the rise is due to temporary effects of higher energy prices and exchange rate pass-through from a lower loonie.  The Bank also noted that slower than expected global economic growth has trimmed the Bank's Canadian economic outlook for the next two years. This means the Canadian economy will be delayed in reaching full capacity, now expected in 2016 rather than 2015.

In spite of low inflation and disappointing growth, the Bank of Canada remains wary of easing monetary policy further at risk of upending the delicate balance of over-indebted Canadian households.  Interestingly, the Bank explicitly stated that it remains neutral with respect to both the timing and direction of the next change in interest rates, which leaves the door open for a rate cut should incoming data warrant it. 
 That said, we still expect that the next move for the Bank to be in the direction of higher rates. In particular, recent momentum in consumer prices, if sustained, may push the Bank to act sooner rather than later though very likely not until early to mid-2015.