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Weekly Economic Letter

Looking the BoC's scenario in the mouth

Tue, Jul 28 2009, 05:55 GMT
by Economic and Strategy Team

National Bank of Canada  |  View company's profile


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Summary

  • The Bank of Canada reiterated last week that it expects to keep its policy rate at 0.25% until next June, “conditional on the outlook for inflation.” Because of the difficulty of gauging excess capacity in the economy, the Bank’s inflation safety margin could be slimmer than it thinks.

  • The current output gap is about the same as in the 1990 recession and inflation is only 1.4 points lower. The real policy rate, however, is almost 8 points lower than it was then. The historical three-way relationship of output gap, real rates and inflation rate no longer seems to hold.

  • A close look at the Bank’s scenario for the economy leads inescapably to the prospect of a highly aggressive tightening campaign from mid-2010 to mid-1011, along with abnormally short time lags for transmission of monetary policy to the economy.

  • From mid-2010, when the Bank says it expects to begin raising rates, to mid-2011, when it expects the economy to be back to capacity production, the Bank would have only 12 months to get its real policy rate up from the basement – close to minus 2% – to an appropriately neutral point.

  • The time for tightening is not yet at hand, but June 2010 seems too late. The day when the condition for the Bank’s low-rate commitment is no longer met will probably come before then.

Published on  Tue, Jul 28 2009, 05:58 GMT


National Bank of Canada http://www.nbc.ca/ | info@nbc.ca

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Legal disclaimer and risk disclosure

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.
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