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Central Bank Outlook: BoC Policy On Hold, Softer Growth
- As expected, BoC continues to hold policy rate. The Bank of Canada (BoC) maintained the overnight rate target at 1%, where it has been since September 2010, on weaker domestic growth forecasts and rising external headwinds. BoC governor Mark Carney’s policy statement suggested a bias towards tightening—contingent on the global backdrop—while markets are pricing in an a policy pause which likely continues into 2013 (or 2014).
- Growth projections adjusted downward. The BoC is forecasting growth of 2.1% in 2012, down from 2.4% in its previous set of projections released in April. This is in-line with the DE view of 2% to 2.5% growth this year with risks tilted towards the downside. Growth in 2013 was also revised downward from a quarter ago, by one-tenth to 2.3%. More details will be released tomorrow in the quarterly Monetary Policy Report (10:30 a.m.).
- Domestic economy to drive growth, as global growth weakens. The central bank stated that “domestic factors are expected to support moderate growth,” with consumption and business investment as the main contributors. The Eurozone appears to be contracting, while the U.S. expansion recently has taken on a slower pace. Emerging market growth is slowing more rapidly and more broadly than expected.
- Inflation to remain below target on lower commodity prices. The inflation profile is softer than expected on easing gasoline and commodity prices—which, while elevated relative to history, have eased somewhat on the slower global growth prospects.
- The DE forecast is that rates will remain on hold at least until the 2013 as global and domestic conditions roughly offset.