On Tuesday morning the Bank of Canada decided to leave its overnight interest rate unchanged at 1.0% and confirmed the caution expressed by Governor Mark Carney on CNBC almost a month ago. The concluding paragraph in the statement on monetary policy summarizes the Bank’s concern about current economic conditions:
“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.”
The Bank of Canada provided a litany of points to support its position as the global economic recovery enters a “new phase”:
- The inventory cycle is ending
- Pent-up demand has become satiated
- Fiscal stimulus is giving way to fiscal consolidation (in some countries this is “austerity”)
- Weaker economic prospects in the United States, Canada’s largest export market
- Growth in emerging markets slowing to a more sustainable pace as monetary policy tightens
- Growing tensions over currency exchange rates
All this adds up to a lower growth forecast and lower inflation that earlier expected:
“The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011, and 2.6 per cent in 2012….
…The Bank judges that the output gap is slightly larger and that the economy will return to full capacity by the end of 2012 rather than the beginning of that year, as had been anticipated in July. The inflation outlook has been revised down and both total CPI and core inflation are now expected to converge to 2 per cent by the end of 2012, as excess supply in the economy is gradually absorbed and inflation expectations remain well-anchored.”
As I suggested last month, the Canadian dollar can no longer be considered a strong choice as an anti-U.S. dollar bet. Carney made it clear last month that the Bank of Canada’s monetary policy cannot diverge too much from policy in the U.S., and Tuesday provided firm confirmation.
The Canadian dollar has toyed with parity twice this year as it has bounced within a wide trading range. I will not be surprised to see the Canadian dollar do no better at the end of this year.
Source: dailyfx.com charts
Be careful out there!
Full disclosure: no positions