- On June 10 the BoC shocked financial markets by not only keeping its key interest rate unchanged at 3.00% (there was almost unanimous consensus for a 25bps rate cut) but moved back from an easing to a neutral bias. After tougher inflation talk from the Fed and ECB ahead of the June 13-14 G8 summit, the BoC joined them in citing upside inflation risk as the rationale behind its decision. Since the BoC’s April monetary report, real-side economic developments have been broadly in line with expectations but ‘the balance of risks to the Bank’s April projection for inflation in Canada has shifted slightly to the upside’. In the April MPR the bank did note that it was more focused on ‘core’ service sector inflation, the GDP chain price deflator and wages which have all run at a stronger year on year pace than headline and core CPI. In any case, core CPI inflation has rebounded to 2.7% annualized in the latest four months – near the top of the 1-3% target – vs. just flat the prior four months.
- Straight after the BoC decision the markets are pricing in both a fed funds and BoC overnight target rate of 3.50% a year from now meaning more aggressive tightening by the Fed (current rate 2.00%) than the BoC (current 3.00%) but tightening by both nonetheless. Hikes in both Washington and Ottawa have become more likely but it is wrong to be pricing in more in the former than the latter.
- Market was surprised at the June 9 pre-G8 briefing by Canada’s Finance Ministry where an official noted that Canada and Europe were ‘bearing the brunt’ of the US dollar’s long cyclical drop. Surprised because the CAD has been one of the weaker major currencies since its ‘burden sharing’ concerns were first raised in early November ahead of the G20 meeting in Capetown. With Canadian terms of trade much higher than in November - yet the currency a significant underperformer over the same period - one might have assumed that the Finance Ministry would have dropped its reference to CAD bearing a disproportionate burden. It indicates that the Canadian authorities are still hedging their bets and would be reluctant to endorse a move much beyond parity.
- What happens thereafter largely depends on the oil price path which is assumed to be lower medium term.
Canada Monetary Policy and the Exchange Rate
June 14th, 2008 · No Comments
Tags: Canada Canadian Economy
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