BoC holds rate, opens the door to future cuts

BoC holds rate, opens the door to future cuts

by Invesco Canada

The Bank of Canada (BoC) announced yesterday that it is maintaining the target overnight rate at 0.5%. The decision to leave the overnight rate unchanged was generally expected by the market, but the BoC statement included language that was more dovish than previous releases.

The tone of recent statements had been fairly upbeat, with the BoC expecting a growth rebound in the latter half of the year after second quarter growth disappointed due to the Alberta wildfiresā€™ effect on oil production and the unexpected drop in exports.

The current statement downgraded the outlook for several items not previously acknowledged. First, the BoC mentioned that global growth during the first half of 2016 was slower than it had projected in the July Monetary Policy Report. Second, the statement acknowledged that the outlook for business investment has become less certain. Third, the Bank mentioned the recent slowdown in the Vancouver housing market.

The Bank remained optimistic in its outlook for growth remaining ā€œabove potentialā€ as consumers get help from the new Canada Child Benefit payments and exports are expected to pick up. The Bank noted that risks for inflation ā€œhave tilted somewhat to the downsideā€ but that ā€œthe overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate.ā€1

While the statement contained a few surprises, the BoC appears to have overlooked previous signs of weakness and seems to be repositioning itself in case economic activity fails to pick up according to their expectations.

The acknowledgement of decreased risk of inflation led the market to an immediate dovish reaction as short-term interest rates rallied several basis points2 more than long-term rates and the Canadian dollar sold off to 77.5 cents immediately after the announcement.

The BoC has opened the door to a cut in the overnight rate in the future, but as opposed to a rate cut being imminent; it appears there would need to be a continued deterioration in economic conditions before they would act.

This post was originally published at Invesco Canada Blog

Copyright Ā© Invesco Canada Blog

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