The Bank of Canada announced this morning that it is
maintaining its target for the overnight rate at 1 per cent. In its
accompanying statement, the Bank noted that the economy is preceding largely on
the path the Bank projected in its January Monetary Policy Report. While
inflation and growth were slightly higher than expected in the fourth quarter
of 2013, the Bank expects slack in the economy to keep inflation below the
Bank's 2 per cent target this year. The Bank does not view the risks associated
with elevated household imbalances as materially changed and judges the current
stance of monetary policy, with the overnight rate at 1 per cent, as
appropriate.
Speculation of an impending rate cut by the Bank of Canada
has receded in recent weeks following a modest acceleration of inflation and
stronger than expected economic growth. The uptick in inflation and growth is
in part due to a sharply lower Canadian dollar and, while not explicitly
targeting a lower value of the loonie, policymakers at the Bank have welcomed
the decline in the dollar. A depreciation in the currency tends to be
inflationary and impacts consumer prices in fairly short order while
traditional monetary policy, through adjusting the overnight interest rate,
impacts inflation only with a significant lag of 12 to 18 months. With the lower loonie helping to pull
inflation higher, we expect the Bank will likely maintain its target rate at 1
per cent until 2015 when economic conditions may require a gradual increase in
the overnight rate.
Copyright BCREA - reprinted with permission
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