Bank of Canada Keeps Rates on Hold

The Bank of Canada reported little change in monetary policy since its last policy meeting on December 6^th. The BOC predicts that growth will lower to 2% in 2012 softening from growth of 2.4% in 2011. Canada’s gross domestic product rebounded quicker during the second half of 2011 than what had been expected earlier. Furthermore, the country’s growth will increase in 2013 to 2.8% and return to capacity in the third quarter, a quarter earlier than previously projected.

Policy makers maintained that the 1% interest rate is already low enough to stimulate the economy. The lowered interest rate has increased health of Canada’s financial systems according to the BOC. Since the BOC released its previous report the European debt crisis has worsened and the European recession will be deeper and longer than previously thought. Extended uncertainty about the global economic condition is expected to slow business investment growth. Exports are not expected to impact growth substantially as foreign demand will remain at a conservative rate. Commodity prices are projected to go lower than what was previously estimated by analysts. On the other hand, financial conditions are expected to improve within the country which should increase housing activity and domestic consumer demand. Furthermore, the anticipated changes to inflation remained as previously reported with inflation expected to change moderately in 2012 and rise to 2% in the third quarter of 2013. The rise in inflation is expected to occur as labor pay increases and excess supply is absorbed.

The USDCAD remained unchanged after the rate decision as it consolidated around support at 1.0125. The U.S. Dollar strength has been balancing the neutral policy stance of the Bank of Canada. We expect more Dollar strength in the coming days due to safe haven flows. If the USDCAD makes a decisive break above 1.0150, the next level of resistance is seen at 1.0250.    

Eugene Ross, Analyst

Admiral Markets

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