Canada Commences Monetary Policy Normalization

Includes: CEF, CM, CNDA, CUD, EWC, FXC
by: Econ Grapher

The Bank of Canada became the first G7 country to raise rates, lifting the target for the overnight rate 25bps to 0.50%, a move widely expected. The bank, however, did note the considerable risks to domestic and global growth, and noting the quote below, the path back to neutral may not be clear cut:

This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

The bank also commented in its statement about the relative strength of the Canadian economy. Indeed, Canada recorded q/q GDP growth in Q1 of 1.5%, showing a consistent uplift in momentum of its recovery. Unlike the other G7 economies, Canada benefits more from a recovery in commodity prices, and of note, a relatively strong fiscal position (having realised the importance of fiscal discipline in previous years).

Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed. Going forward, household spending is expected to decelerate to a pace more consistent with income growth. The anticipated pickup in business investment will be important for a more balanced recovery.

So the outlook for the Canadian economy is reasonably robust, it is a similar case to Australia, and these two economies are among the leaders in the developed and industrialised economies.

In terms of the interest rate and monetary policy outlook, if all else were held constant, if there were no euro crisis, if China's economy was growing sustainably, and if all the wild cards were hidden away, then you would probably expect a series of further increases in the rate by the Bank of Canada.

However as these are, once again, interesting times, the pace and consistency of interest rate increases on the path to Canadian monetary policy normalisation will certainly be uneven... just as the global recovery will continue to be uneven.


Disclosure: No positions