Forex Investment and Currency Trading

As widely expected, the Bank of Canada (BoC) lowered the overnight rate target by another 50 basis points to ½% today. The bank also correspondingly reduced the operating band for the policy rate and cut the Bank Rate to ¾%. The BoC judged that the global economic outlook deteriorated further since the January Monetary Policy Report Update (MPRU), and the U.S. recession presented greater challenges for Canada. Central bank officials noted that fourth quarter 2008 real GDP undershot their projection and that potential delays in stabilizing the global financial system and more substantial weights on domestic demand would push the closing of the output gap to early 2010. The BoC also anticipates a slightly lower profile for core
inflation as a result.

The BoC restated that stabilization of the global financial system remains a precondition for global and Canadian economic recoveries. Additionally, the timely implementation of ambitions plans to address troubled assets and recapitalize financial institutions will also be vital. As such, the bank assured market observers that the 400bp of easing in Canada and aggressive monetary and fiscal policy elsewhere should begin to be felt in the second half of this year and build through 2010. Once the global financial system is stabilized and global growth recovers, Canada will follow suit, with a likely more rapid recovery than in most other industrialized nations.

It is anticipated that the BoC would offer a reminder of the power and importance of monetary policy in stimulating the economy. Monetary policy does have an immediate impact in terms of lowering key borrowing rates, but much of the impetus comes with a lag of a year or more. Moreover, as the combined efforts of governments and central banks around the world gain greater traction, the rising tide should lift all boats, including Canada.

What was new and encouraging about today’s statement, was the stronger commitment language from the BoC. In the January statement, the bank merely reiterated its objective – keeping inflation low, stable and predictable – as the best way that it could support the financial system and stimulate the economy. But today, the BoC took a bold step in stating that markets should expect that the overnight rate will remain at the new level or even lower until there are clear signs that excess supply in the economy is being taken up. This is akin to the Fed’s stating that “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” This is an important and welcome maneuver, which should signal to markets that the BoC, like certain other central banks, is willing to employ all available tools to promote the resumption of sustainable economic growth and to achieve its inflation goals. This could include yet another round of rate cuts and/or the use of even more unconventional tools.