Bank of Canada keeps rate unchanged

As expected, the Bank of Canada left its benchmark overnight rate unchanged at 1.00%.  The Bank described the global economic outlook as “broadly consistent” with its projection. The recent sequestration cuts in the U.S. were cited as a factor making the fiscal drag on the U.S. more front-loaded, but still in-line with its two year outlook for the U.S. economy.

On the domestic front, the Bank recognized the continued slack in the Canadian economy with the weak Q4 GDP reading and current soft inflation environment, but “expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment.”  The outlook for inflation was subdued, with core and CPI inflation expected to remain at their current low levels in the “near term, before rising gradually to reach 2 per cent over the projection horizon”  The Bank also recognized the healthier evolution of household credit and expects further moderation in this regard.

Key Implications

Given the current economic environment – both globally and domestically – today’s interest rate decision came in as expected.  The Bank highlighted the soft numbers that were recorded in recent months. Indeed, Q4 real GDP (+0.6% annualized) released last week point to the economy currently running in neutral to finish 2012. The weak hand-off from December (-0.2%, m/m) also means that 2013 will not have a rolling start either. These readings suggest that there exists downside risk to the Bank’s 2.3% real GDP forecast in 2013Q1.

Persistent weakness in inflation – January’s reading marked the tenth consecutive month that inflation has come in below the Bank’s 2.0% target – also points to the Bank remaining on the sidelines until 2014 when it comes to interest rate moves.