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Bank of Canada monetary policy preview

Today Bank of Canada (BoC) is to provide further guidance in policy meet. The result of the monetary policy meeting is scheduled to be announced at 15:00 GMT.

Current policy measures–

  • Stronger economic rebound and higher inflation have prompted the central bank to raise rate twice this year. Since July, it has hiked twice by 25 basis points each time.
     

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. The headline inflation is currently at 1.4 percent, it has been showing lots of volatility lately.

Economy at a glance:

  • Canada is a very small economy of $1.53 trillion approximately, compared to its larger neighbor, the United States.
  • Canada suffered technical recession last year as GDP contracted in both first and second quarter of 2015. As of December 2015, annual GDP growth rate has dropped to 0.3 percent from 3.1 percent two years ago. However, it has bounced to 1.1 percent in the first quarter of last year. In the second quarter, the economy shrank by 0.3 percent, only to recover by 0.9 percent in the third quarter. In the fourth quarter, GDP grew by 0.6 percent. In the first quarter of this year, growth has rebounded strongly with 0.9 percent on a quarterly basis and 2.9 percent annualized rate. The second quarter growth rate was even stronger at 1.1 percent q/q. The third quarter was even better with GDP growing at 3 percent y/y.
  • The unemployment rate has declined to 5.9 percent, still, higher than its long-term average.
  • The Canadian housing sector has come under strain in recent times after big price rises in previous years.

Return of growth in the US is expected to help the Canadian economy as a whole. However, President Donald Trump’s trade policies creating concerns, along with policy uncertainties.

Expectation –

This year, especially since early June, BoC policymakers, especially Governor Stephen Poloz stepped up the hawkish rhetoric and suggested that the possibility of a hike remains in play. The governor has followed through his words and hiked twice. Since he has signaled a pause after two hikes, another one is not expected today. Instead, the focus will be on future guidance.

Impact:

Since BoC’s suggestions in early June, the Canadian dollar has strengthened from 1.35 per dollar to 1.206 by September, riding on two rate hikes. It has since come under strain over oil price, low inflation, and NAFTA negotiations. Moreover, Canadian crude, known as West Canada Select (WCS) is trading at large ($23 per barrel) discount to Brent.

Since the focus will be on future guidance, the movements would depend on wordings.  The Canadian dollar is currently trading at 1.267 per U.S. dollar.

 

 

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