Bank of Canada monetary policy preview

Today Bank of Canada (BoC) is to provide further guidance in policy meet. The result to be announced at 14:00 GMT.

Current policy measures–

• BoC is maintaining overnight deposit rate at 0.5 percent
   

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. Headline inflation has fallen close to 1 percent in October last year from 2.5 percent in 2014. Since then it has risen sharply to 2 percentage in January. In February reading came at 1.4 percent. In April it reached 1.7 percent, 1.5 percent in May, 1.3 percent in July, and 1.1 percent in August.  The data has been showing lots of volatility lately.

Economy at a glance:

• Canada is a very small economy of $1.55 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. As of December, annual GDP growth rate has dropped to 0.3 percent from 3.1 percent a year ago. However, it has bounced to 1.1 percent in the first quarter of this year. However, in the second quarter, the economy shrank by 0.4 percent.
• The recovery in oil price hadn’t been much of a boost since severe wildfire has taken a large portion of the production (more than 1.5 million barrels/day) offline. The production is still recovering and may not recover fully until the first quarter of 2017.
• The unemployment rate ticked up to 7.3 percent, compared to the pre-crisis level of 6 percent. However, recently it ticked down to 7 percent last month.
• 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.

What to watch out for –

BoC is expected to keep policy on hold today. Focus will be on what the bank’s take on the inflation and recent meltdown in the housing sector.

At least another rate cut is expected in the near future from BoC if the situation worsens.

Some changes in communication would be vital to watch for -

• Changes in the inflation expectation ahead.
• Take on the OPEC deal.
• The outlook for oil price and impact on the economy.
• The changes in growth forecast ahead and views on ailing manufacturing.
• The recent volatility in inflation rate and meltdown in the housing sector.

Impact:

We expect the Canadian dollar to weaken in the short run to as much as 1.4 per dollar but strengthen in medium to longer term to as high as 1.18 per dollar. Key support for the USD/CAD pair lies at 1.28 area. The loonie is currently trading at 1.308 per dollar.