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Central Bank Outlook: BoC Holds Rates
- The Band of Canada continues to hold interest rates. The BoC maintained the overnight rate target at 1%, where it has been since September 2010, on worsening global conditions and tame domestic growth. BoC governor Mark Carney’s policy statement suggested that tightening is the more likely scenario in the coming months—contingent on the global backdrop.
- Global uncertainties accelerate. Risks are building in the Eurozone, the slowdown in emerging markets is more pronounced and widespread than expected, and U.S. growth is only modest.
- GDP forecasts undershoot forecasts, hint at imbalances. Domestic growth is unbalanced in Canada with growth concentrated in investment in Q1. Consumption activity is weaker than expected, while fiscal expenditures and net exports are not predicted to contribute much to growth this year.
- Price pressures remain subdued. Commodity prices ease on a weakening global outlook and domestic gas prices recede after March highs.
- Canada faces a dichotomy. Global conditions suggest that easing is the most likely next move, while domestic conditions (and the tone of the BoC) indicate that rate hikes are forthcoming.
- DE Forecast: rates to remain on hold through 2012. However, the DE forecast is unchanged: rates will likely remain on hold at least until the end of 2012 as global and domestic conditions roughly offset.
- The reason for the tightening talk? Carney, also chair of the Financial Stability Board, puts an utmost priority on clear communication. At the last BoC meeting, he first suggested the possibility of rate hikes. The BoC may view that it would be too distressing to markets to change its tone so quickly—however, anytime that a financial crisis becomes a possibility, risks tilt towards easing.