BoC Holds Steady- Poloz Worried By Inflation Risks

Includes: FXC
by: Dean Popplewell

By Dean Popplewell

No surprises from the Bank of Canada this morning. They left their benchmark overnight rate unchanged at +1% and maintained a "neutral" policy stance. The BoC indicated that the "downside" risks to inflation remain important.

The balance of risks continue "within the zone" for which the current policy stance is appropriate, and the "timing and direction of the next change to the policy rate will depend on how new information influences the balances of risk."

The BoC noted that total inflation has moved around their +2% target sooner than anticipated due to "temporary effect of higher energy prices." However, the core-CPI remains below their medium term target.

The Bank's comments could be copied and pasted from most G7 central banks playbook. Not surprising, Canadian policy makers highlighted their concerns of their largest trading partner, the United States. They said that the underlying momentum in the US economy appears to be slightly less than previously expected, and a recent spate of weak data gives "greater weight to downside risks to global growth."

The BoC has been pinning their hopes on both exports and investment growth to drive the Canadian economy. This morning they indicated that it might take longer to materialize. However, they seem confident that the ingredients for a pickup in exports are in place. The weakening loonie is obviously helping the cause and should be expected to strengthen foreign demand.

The Loonie was hovering around the $1.0925 level before the release and has weakened to an intraday dollar high of $1.0955. Money markets continue to price the first possible rate hike to occur mid-2015. Today's predictable release has failed to materially move either the loonie or CAD bonds. The market would prefer to wait for next month's meeting at which updated economic projections will also be released.