Bank of Canada leaves rates unchanged, acknowledges heightened risks globally, but still hints higher rates to come

  • As was widely expected, the Bank of Canada held its benchmark overnight rate at 1.00% acknowledging the recent “sharp deterioration in global financial market conditions”, but maintaining its April stance that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate”.
  • The bank stated the outlook for global economic growth has weakened, and that some of the European risks are materializing. It also characterizes the emerging market slowdown as a bit faster and broader than it had expected.
  • Domestically, while it noted slower-than-expected first quarter growth, it stated the underlying economic momentum appears largely consistent with expectations, although less balanced.
  • Perhaps most surprising, in its forward-looking statement, it only added a clause that affirmed that the future path of rates is conditional on continued economic expansion, but kept the wording surrounding the modest withdrawal of stimulus unchanged.
Key Implications
  • The Bank of Canada is in the unenviable position of having to balance the reality of a closing output gap domestically with the hit to confidence and growth from the market’s downturn and deteriorating conditions in Europe. Today’s statement struck a very prudent balance, acknowledging the weaker global economic outlook, but also reminding markets (who had priced in a chance of a rate cut by year end) that barring a global catastrophe the next interest rate move will be up, not down.
  • We judge that the Bank is firmly in wait-and-see mode. If the Greek elections produce a more stable coalition, and Europe is able to limit the financial contagion from its more troubled economics, the Bank would use a period of calm to start removing some of the considerable monetary pol icy stimulus still in place.

Leslie Preston, Economist

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