BOC Keeps Rate Hike Bias… But Cuts Growth Forecasts?!

Yesterday Bank of Canada Governor Mark Carney delivered his last monetary policy statement before he handles the reins in the Bank of England (BOE) this July. And boy did he know how to end his term with a bang!

In his speech Carney stated that the BOC kept its interest rates steady at 1.00%. Not only that, but the BOC had also downgraded its growth and inflation forecasts. It now expects the economy to grow by 1.5% in 2013 instead of 2% while the inflation rate is expected to reach their 2% target in mid-2015 instead of the second half of 2014.

On Economic Growth

The BOC cited the Loonie’s strength and Canada’s resulting weaker-than-expected exports as one of the key factors in its decision to lower its growth forecasts. It also kept an eye on household spending, which is moderating in the face of reduced job opportunities and lower consumer confidence.

Last but definitely not the least, the BOC worried over the decline in government outlays as well as the unexpectedly weak business investments on machinery and equipment.

Before you cry “the sky is falling in Canada” though, you should know that although Carney considers these factors as “material slack,” he also believes that it’s nothing to worry much about, especially when you compare it to other major economies.

On Inflation and Interest Rates

Because consumer credit in Canada is higher compared to other countries, Carney has been constantly reminding Canadians to make sure to keep their debts within reach as interest rates would soon rise. He’s been saying this for over a year, but in his last statement as the BOC’s head honcho, he stopped nagging about the matter.

It would seem that the recent weakness in growth and inflationary pressures was enough for him to drop his usual rhetoric. Instead, he said that the BOC would likely keep interest rates at record-lows in the foreseeable future.

How did the Loonie react to the BOC’s tone?

It barely budged. USD/CAD initially spiked following the statement and tapped an intraday high of 1.0295. But after just a few minutes, it was already back down to its pre-BOC statement levels.

USD/CAD

In this humble old man’s opinion, markets still think that the BOC Is ready to hike rates. Central bankers are merely waiting for the right economic conditions to pull the trigger and tighten up monetary policy. Now the question is, how long will this impasse last?