The Bank of Canada will leave the policy rate unchanged at 1% for a 7th month on Tuesday. Yet, the accompanying statement will likely be slightly more hawkish than the previous one given signs of strong domestic growth and rising inflationary pressures...
The Bank of Canada will leave the policy rate unchanged at 1% for a 7th month on Tuesday. Yet, the accompanying statement will likely be slightly more hawkish than the previous one given signs of strong domestic growth and rising inflationary pressures. The BOC will weigh growth and inflation against appreciation in Canadian dollar, as well as uncertainties in Japan and the MENA region in deciding to stand on the sideline in April. We expect the central bank to resume tightening in June.
According to the quarterly Business Outlook Survey released last week, the net percentage of companies predicting fasting growth during the next 12 months fell to 13% in 1Q11, downgrade from 22% in the prior quarter. Meanwhile, 24% of companies planned to increase spending on machinery and equipment, compared with 29% in the prior quarter. Although expectations about sales and investment moderated from the previous quarter, the outlook remains robust. In addition, the BOC changed its tone regarding inflation outlook. As mentioned in report, the 'strength in commodity prices' has raised expectations for costs and inflation. For the first time since 2009, the central bank dropped the reference that inflation expectations are 'anchored' to the 2% target. The BOC this time said inflation expectations have 'moved up but remain concen¬trated within the Bank's inflation-control range'. The BOC is not going to hike rates in April despite a 'move-up' in inflation expectations because it probably views recent price pressures as well as expectations as transitory.
Appreciation in Canadian dollar has been a factor hindering BOC's tightening progress. Since the previous meeting on January 18, Canadian dollar has risen almost +3% against the US dollar. CAD surged to 0.953, the strongest level since November 15, 2007, last week. In the quarterly survey, it's revealed that a number of firms concerned about the impact of the high Canadian dollar and strong foreign competition on their business over the medium- to long- term.
The consensus of the next rate hike will be a rise of +25 bps in July. This is in line with our expectations as the central bank will not likely leave the accommodative monetary policy for too long with spare capacity shrinking and inflation pressures heightening.
Special Reports | Written by ActionForex.com | Apr 11 11 07:26 GMT