BoC Leaves Overnight Rate Unchanged, Removes Tightening Rhetoric

As expected, the BOC decided to leave the overnight rate unchanged at 1% and correspondingly, Bank Rate and the deposit rate at 1.25% and 0.75% respectively. The accompanying statement delivered a less hawkish tone than before. As global economic has deteriorated in recent weeks and total CPI inflation will continue to moderate as temporary factors unwind, the central bank believed the need to withdraw monetary policy stimulus has 'diminished'.

The BOC listed a series of events that has caused the recent instability in the economy and financial markets. The European sovereign debt crisis has intensified and 'significant initiatives by European authorities' are needed to resolve the 'acute fiscal and financial strains'. Economic indicators suggested the risk of US recession heightened and fiscal stimulus in the country will 'soon turn into material fiscal drag'. Growth in emerging markets will inevitably be dragged down by weakness in advanced economies.

In Canada, growth eased in 2Q11 as driven by temporary factors and the central bank remained confident that growth will resume in the second half. However, persistent strength of the Canadian dollar will affect net exports which are 'expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges'. Concerning inflation, The BOC expected inflation will ease as high food and energy prices moderate. Yet, the central bank at the same time warned that while 'commodity prices have declined owing to diminished global growth prospects, they remain relatively high'.

Concerning monetary policy, the central bank removed the reference that 'to the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn'. Instead, it stated 'in light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished'. The meeting outcome was largely in line with our expectation. We retain our view that the BOC will leave the policy rate unchanged at least until mid-2012.