Data Release: Bank of Canada holds interest rates steady at 1.00%

Good Morning,

TD Economics

Data Release: Bank of Canada holds interest rates at 1.00%

• As expected, the Bank of Canada left its benchmark overnight rate unchanged at 1.00%.
• As for the much watched forward-looking language, the Bank reiterated that “over time, some modest withdrawal of monetary policy stimulus will likely be required”, and that the timing on such a move will be “weighed carefully” against global and domestic developments.
• In its assessment of how those global economic conditions are developing, the Bank stated that the U.S. economic expansion is progressing at a gradual pace, but being held back by uncertainty related to the fiscal cliff. Growth in China appears to be stabilizing, and global inflationary pressures are subdued in response to persistent excess capacity. The Bank also highlighted that globally financial conditions remain stimulative, although vulnerable to an economic shock from the U.S. or Europe.
• For Canada, the bank chalked some of the third quarter weakness to transitory disruptions in the energy sector, but expects momentum to pick up in 2013. It also noted that household credit growth has slowed, but that it is too early to tell whether the moderation will be sustained. The Bank also noted that exports continue to be restrained by weak foreign demand and competitiveness challenges.
• Inflation has evolved broadly as the Bank expected, with total and core inflation set to return to 2% over the next 12 months.

 Key Implications

• After surprising markets last week with the announcement that Governor Carney will be leaving for the Bank of England, today’s interest rate announcement did not change the calculus for monetary policy in the months ahead. The Bank maintained its forward-looking language, and there was nothing unexpected in its assessment of economic developments since the last statement.
• With the economics world waiting for a resolution to the fiscal negotiations in Washington, January’s statement and Monetary Policy Report are likely to provide a lot more meat on the Bank’s expectations for Canadian growth in a post-fiscal cliff world. For now, the Bank maintains its prudent tightening bias; barring unforeseen events the next move in Canadian interest rates in up, rather than down. And overall, TD Economics continues to expect the Bank of Canada to be the first among its peers to hike rates, likely in the second half of 2013, but that interest rate increases will be modest and occur in gradual steps.