The Bank of Canada puts monetary tightening aside for now

The Bank of Canada made no changes to monetary policy in April keeping the key target for the overnight rate at 1.25% in what was seen as a dovish statement undermining the value of CAD, especially against US Dollar.

The key element of the economic development being inflation and wage were highlighted by the Bank of Canada that said it will monitor the dynamics of inflation and wage growth and “this progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target. “

The general view on the Canadian economy is positive as the Bank of Canada sees inflation rising above 2% as transitory and the economic growth is expected to return back to robust 2% for the first half of 2018 while the economic weakness in Canada’s housing and exports are both expected to unwind in 2018.

Key points from the Bank of Canada monetary policy statement from April 18:

• Consistent with an economy operating with little slack, core measures of inflation have continued to edge up and are all now close to 2%. The transitory impact of higher gasoline prices and recent minimum wage increases will likely cause inflation in 2018 to be modestly higher than the Bank expected in its January Monetary Policy Report.
• GDP growth in the first quarter was weaker than the Bank had expected but should rebound in the second quarter, resulting in 2% average growth in the first half of 2018. The economy is projected to operate slightly above its potential over the next three years, with real GDP growth of about 2% in both 2018 and 2019, and 1.8% in 2020.
• Slower economic growth in the first quarter primarily reflects weakness in two areas. Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017. Exports also faltered, partly owing to transportation bottlenecks. Some of the weakness in housing and exports is expected to be unwound as 2018 progresses.
• Canadian exports will strengthen as foreign demand increases, but not sufficiently to recover the ground lost during recent quarters.
• Growth in consumption remains robust, supported by strong labor income growth. Wages have continued to pick up as expected, even after factoring out recent minimum wage increases in Ontario and Alberta. The Bank will continue to assess labor market data for signs of remaining slack.
• The Bank of Canada will monitor the dynamics of inflation and wage growth. This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.