Unchanged Monetary Policy Stance Expected at BoC's Meeting
Both market expectations and economic development evolved recently point to an unchanged monetary policy stance at BoC's March meeting. The central bank will most likely announce to keep its policy rate at 0.25% and keep the statement that 'conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target'. Currently, the market anticipates the first rate hike will be in 3Q10 the earliest.
At January's Monetary Policy Report, BoC acknowledged economic recovery is under way in Canada and the outlook for global growth is somewhat stronger than in October. However, considerable excess supply remains. BoC forecast Canadian economy to return to full capacity and inflation to return to the 2% target in the third quarter of 2011. The Canadian economy is projected to grow by +2.9% in 2010 and +3.5% in 2011, after having contracted by an estimated -2.5% in 2009.
Economic data released since then have been slightly stronger, but the degree of improvement still did not warrant an early rate hike. The BoC forecast GDP had grown +3.3% q/q in 4Q09 (annualized), following a disappointing expansion of +0.4% in the previous quarter.
Strength in indicators released recently suggested upside risks to 4Q09 growth. Manufacturing sales, wholes sales and retail sales soared +1.6%, +0.7% and +0.5%, respectively, in December from a month ago. The gains were robust but were weaker than market expectations. Leading indicators jumped +1.5% m/m, the biggest increase in more than 50 years, in December. This also signals strong economic growth.
Headline CPI on Canada rose to +1.9% on annual basis in January from +1.3% in the prior month. The stronger-than-expected was driven by +23.9% year-over-year increase in gasoline prices. The core inflation also surged +2% y/y in January, from +1.5% y/y in December.
Despite the robust January reading, both total and headline CPIs remained below the central bank's 2% target. Moreover, as we mentioned in our report '2010 Currency Outlook: CAD', inflation will likely retreat in February and March, reducing imminent needs to address the issue.
In other parts of the world, both US manufacturing index and 4Q09 GDP exceeded market expectation but consumer confidence fell more than forecast. In Europe, sovereign debt problem remains a concern in the financial market.
Balancing all risks from both the domestic market and the external world, the BoC should decide to adhere to previous monetary policy stance.
Both market expectations and economic development evolved recently point to an unchanged monetary policy stance at BoC's March meeting. The central bank will most likely announce to keep its policy rate at 0.25% and keep the statement that 'conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target'. Currently, the market anticipates the first rate hike will be in 3Q10 the earliest.
At January's Monetary Policy Report, BoC acknowledged economic recovery is under way in Canada and the outlook for global growth is somewhat stronger than in October. However, considerable excess supply remains. BoC forecast Canadian economy to return to full capacity and inflation to return to the 2% target in the third quarter of 2011. The Canadian economy is projected to grow by +2.9% in 2010 and +3.5% in 2011, after having contracted by an estimated -2.5% in 2009.
Economic data released since then have been slightly stronger, but the degree of improvement still did not warrant an early rate hike. The BoC forecast GDP had grown +3.3% q/q in 4Q09 (annualized), following a disappointing expansion of +0.4% in the previous quarter.
Strength in indicators released recently suggested upside risks to 4Q09 growth. Manufacturing sales, wholes sales and retail sales soared +1.6%, +0.7% and +0.5%, respectively, in December from a month ago. The gains were robust but were weaker than market expectations. Leading indicators jumped +1.5% m/m, the biggest increase in more than 50 years, in December. This also signals strong economic growth.
Headline CPI on Canada rose to +1.9% on annual basis in January from +1.3% in the prior month. The stronger-than-expected was driven by +23.9% year-over-year increase in gasoline prices. The core inflation also surged +2% y/y in January, from +1.5% y/y in December.
Despite the robust January reading, both total and headline CPIs remained below the central bank's 2% target. Moreover, as we mentioned in our report '2010 Currency Outlook: CAD', inflation will likely retreat in February and March, reducing imminent needs to address the issue.
In other parts of the world, both US manufacturing index and 4Q09 GDP exceeded market expectation but consumer confidence fell more than forecast. In Europe, sovereign debt problem remains a concern in the financial market.
Balancing all risks from both the domestic market and the external world, the BoC should decide to adhere to previous monetary policy stance.
