Posted by: Daryl & Wendy Ashby | January 20, 2010

BOC Rate Remains till Second Quarter

You could hear the seigh of relief drift acr0ss the city as the Bank of Canada announced today that it will maintain its benchmark rate at 0.25%, continuing a plan started last year to keep the rate unchanged through to the second quarter of 2010. Here’s what some of Canada’s economists had to say about the matter:

Andrew Pyle, associate portfolio manager, ScotiaMcLeod

The Bank has maintained its guidance for rates to stay here until the end of the second quarter, but likewise maintains its flexibility to change if necessary. That flexibility might come in handy if economic developments continue as the Bank has observed since its last meeting.

Embedded in the statement though is the the same note of caution that what has transpired since the world hit the floor last year has been built largely on fiscal and monetary stimulus and there remains a huge question mark on what happens when the steroids are taken away.

Where’s Mark McGwire when you need him? Bottom line, we’re getting closer to that first official rate hike, although some in the currency market may have hoped the first hint would have been dropped today.

Douglas Porter, deputy chief economist, BMO Capital Markets

To the surprise of no one, the Bank of Canada kept interest rates unchanged. Of greater interest was the tone of the press statement, and overall it was mostly neutral, with a hint of dovishness.

On the forecast, the Bank trimmed its call on 2010 GDP ever-so-slightly to 2.9% from its prior 3.0% call, while 2011 was bumped up two ticks to 3.5%. Their call on this year still leaves them above consensus (of 2.6%, which just so happens to be our forecast as well).

The Bank remains committed to the conditional commitment to keep rates steady and low until mid-year. Our view is that the Bank then starts gradually lifting rates immediately thereafter, and there’s little here to sway that outlook. The recovery continues, but it will remain sub-par and still depends on a lot of stimulus. 

Dawn Desjardins, assistant chief economist, RBC Economics Research

Today’s reiteration that overall risks are “tilted slightly to the downside” as a result of policy operating at the lower bound indicates that the bank’s policy plan remains intact and it is unlikely that there will be a change in the overnight rate before the end of the second quarter of this year.

To be sure, a much stronger-than-expected report on the fourth quarter and a round of outsized employment gains could change the timing of the first rate increase.

Our forecast looks for Canada’s economy to build momentum in the quarters ahead although we still project that 2010’s annual growth rate will fall short of those recorded during the early stages of past recoveries. This will likely result in the Bank holding off raising the overnight rate until the summer. We expect the Bank to increase the overnight rate by 100 basis points in the second half of the year as they begin the process of adjusting monetary policy toward a more neutral stance.


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