For those of you expecting a display of fireworks during Stephen Poloz’s first interest statement, I’m sorry that you were disappointed with the lack of any major surprises. As expected, the BOC kept rates steady at 1.00%, where it’s been stuck since September 2010.
However, that doesn’t mean that Poloz’s statement wasn’t noteworthy. In fact, it seemed as though Poloz was keen on making his mark on the BOC right from his debut as central bank governor. Here are three of the more interesting takeaways from the BOC statement:
1. Forward Guidance Bandwagon
Just like his counterparts across the Atlantic, it appears that Poloz has taken it upon himself to implement a forward guidance strategy in order to prep the markets with what the central bank plans to do in the foreseeable future.
Like the Federal Reserve, which has targets for inflation and employment, the Bank of Canada now appears to have its own economic signals to keep an eye on in order to determine which direction to tilt monetary policy towards.
In the accompanying statement last Wednesday, the BOC pointed out that as long as there is slack in the Canadian economy (GDP), inflation remains muted (CPI), and improvements in the household sector (building permits, housing starts), then current monetary policies will remain in place.
2. Weakness on Both Domestic and Global Fronts
Along with the rate statement, the central bank also released its monetary policy report, which included the central bank’s thoughts on economic conditions and growth forecasts. Interestingly, this report was one of Poloz’s pet projects back in the day before he left to take over the Economic Development Canada export agency group.
The report showed that the BOC downgraded its GDP forecasts from its April assessment. After originally pegging growth for the world, U.S., and China at 3.0%,2.0%, and 7.7%, respectively, central bankers now believe that we’ll see growth figures at 2.8%, 1.7%, and 7.4%.
While the central bank revised 2013 Canadian growth upward from 1.5% to 1.8%, the BOC is still wary that the flooding in Alberta and the construction industry strike in Quebec could lead an underwhelming growth figure in Q2 2013.
3. No Currency Jawboning
By the looks of it, the BOC is fine with the Canadian dollar’s current levels. In fact, unlike other central banks that try to talk down their currencies in order to make their exports more affordable in international trade, policymakers at the BOC made no mention of exchange rate concerns.
Although this is understandable since the Loonie has lost a lot of ground to the U.S. dollar recently, it was still a bit of surprise that Poloz didn’t express any concerns regarding Canada’s exports. After all, he used to head an export-related organization so market watchers thought he would focus on the trade industry.
Instead, Poloz simply brushed upon the pickup in Canada’s exports and projected that international shipments could continue to increase in the coming months. He expects stronger momentum in trade to translate to better business confidence and higher investments later on.
At the end of the day, not much has changed when it comes to the BOC’s monetary policy stance, even though Poloz reworded Carney’s usual script which says that a “modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target” into “over time, as the normalization of these conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.”
For now, in the dovish-hawkish spectrum of central banks, the BOC still appears to be stuck somewhere in the middle. With that, the Loonie could remain strong against currencies with very dovish central banks (EUR, GBP, JPY) in the near term.