Bank of Canada rate remains the same with no change in sight

June 4, 2014 | Posted by: Patrick Mulhern

 

 

Bank of Canada 'slaps' down Canadian dollar

Michael Babad

The Globe and Mail

Published Wednesday, Jun. 04 2014, 5:28 AM EDT

 

As The Globe and Mail’s Barrie McKenna reports, the central bank under Governor Stephen Poloz held its neutral stance, giving no signal as to where its benchmark interest rate could be headed, or when.

As expected, it held the key overnight rate at just 1 per cent.

“Global economic growth in the first quarter of 2014 was weaker than anticipated in the [monetary policy report] and recent developments give slightly greater weight to downside risks,” the Bank of Canada said.

“The U.S. economy is rebounding after a pause in the first quarter, but there could be slightly less underlying momentum than previously expected.”

It did note a faster-than-expected rise in inflation, but said that was because of temporary factors, such as higher energy prices.

So called-core inflation, which strips out volatile items, is still “significantly below” its target.

The central bank noted that the economy expanded at a modest pace in the first quarter of the year - by just 1.2 per cent at a annual rate - notably because of the weather.

But it’s still counting on a boost in exports to feed the recovery. And it was careful not to say anything that would drive up the loonie, as Canada’s dollar coin is known, because it’s comfortable with a weaker currency that would help push trade.

 the loonie and provide a boost to exports.”

“The ingredients for a pickup in exports remain in place, including the lower Canadian dollar and an anticipated strengthening of foreign demand,” it said.

The loonie had been as high as about 91.7 cents, but began to slip in anticipation of the announcement, to 91.5 cents. In the wake of the statement, it dipped further to 91.3 cents, and by midday stood at 91.4 cents.

Before today, the currency had been hovering around the 92-cent level, having moved up recently.

The statement, over all, was balanced, citing both the rise in inflation and the threats to the economy.

“It could have been expected that downside interest rates moves were taken off the table but this is not the case,” said Rahim Madhavji of Knightsbridge Foreign Exchange.

“The Canadian dollar fell lower on the Bank of Canada continuing to harp a tone of we’re still nowhere close to raising interest rates,” he added in a research note titled “Bank of Canada slaps loonie lower.”

“It seems that the Bank of Canada is quite content with the lower Canadian dollar boosting exports and assisting with inflation.  Today’s BoC statement removes any catalyst for loonie bulls in the near term.”

Some economists believe the Bank of Canada may well lag the Federal Reserve in eventually hiking its benchmark rate from the current 1 per cent.

“Given our forecast for improving Canadian growth and a weakening C$ over the next year, we’re sticking with our call for the bank and the Fed to hike rates for the next/first time in July 2015,” said senior economist Benjamin Reitzes of BMO Nesbitt Burns.

“An earlier rate hike should not be ruled out, but only if inflation forces the bank’s hand and the loonie isn’t meaningfully stronger than current levels,” he added.

“However, if the currency stays around current levels or better, there’s a solid chance Governor Poloz will choose to lag the Fed by a few months in an effort to weaken

 

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