Bank of Canada Interest Rate Announcement - January 21, 2014
The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 1 per cent. In its statement, the Bank once again highlighted that inflation remains stubbornly below the Bank's 2 per cent target due to significant excess supply in the Canadian economy, as well as heightened competition in the retail sector. The Bank now see inflation returning to target in about 2 years as the effects of retail competition dissipate and excess capacity is absorbed through faster economic growth. In its concluding paragraph, the Bank notes that although the fundamental drivers of inflation appear to be strengthening, inflation remains below target and downside risk to inflation have grown in importance. Most importantly, the Bank notes that the timing and direction of the next change in interest rates will depend on how new information influences the balance of risk between low inflation and elevated household imbalances.
There has been substantial speculation of late that if inflation remains near the bottom of the Bank of Canada’s 1-3 per cent control range over the next six months, then the next move by the Bank will be a rate cut rather than the rate-hike most economists have penciled into forecasts. Indeed, the Bank’s messaging and guidance has been much more dovish of late, essentially reversing the unequivocal tightening bias at the Bank under Mark Carney. The macroeconomic impact of the change in messaging is significant, prompting both a decline in long-term interest rates as well as a substantial decline in the dollar. A result that is both welcome to a slow-growing Canadian economy as well as very likely engineered by policymakers. While we are not in the rate-cut camp (though that outcome is far more likely that it was six months ago), particularly with economic growth in the global economy set to dramatically improve, we believe that an eventual rate tightening is still far out on the horizon.