As a surprise to no one, the Bank of Canada (BoC) announced this morning that its overnight lending rate would remain unchanged at 1.00 per cent for yet another six weeks. This aligned with predictions by all economists, as the real announcement everyone was waiting for was the wording around Canada’s weak rate of inflation.
Canada’s inflation rate rose to 0.9 per cent in November, but it was the seventh month of the past 13 where it was stuck below the bank’s desired range of between 1 and 3 per cent. And by not being able to reach the central bank’s ideal target of 2 per cent, the BoC has had no choice but to be reluctant about increasing interest rates.
In today’s press release, the message on the economy’s rate of inflation was clear:
“Inflation in Canada has moved further below the 2 per cent target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period.”
The BoC now expects inflation to reach its 2 per cent target “in about two years”.
As for growth in the Canadian economy, the BoC says things did improve in the second half of 2013. Governor Stephen Poloz’s hope now is that a stronger demand from the U.S., tied with the recent depreciation of the Canadian dollar this week, should boost exports.
In the end, the BoC’s thoughts on inflation were the key takeaway from today’s announcement.
“Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore has decided to maintain the target for the overnight rate at 1 per cent.”
But perhaps the most important sentence in the entire press release was the last one:
“The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.”
All eyes will be watching for the next interest rate announcement, which is scheduled for March 5, 2014.