Bank of Canada July 21 rate announcement: Analyst reaction

Posted: July 21, 2009, 9:43 AM by Vieira
Bank of Canada

Here is a roundup of analysts’ reaction to the Bank of Canada's rate decision Tuesday, in which it left its benchmark mark unchanged, at 0.25%, and revised upward its economic outlook:

It now sees some expansion in many countries, though the recovery is still "nascent" in the bank's words. Last meeting it talked of an improvement in financial conditions and commodity prices, which it repeated this statement, but added the observed improvement to Canadian business and consumer confidence. It still sees a higher Canadian dollar and corporate restructuring as being a drag on growth. One interesting reference in the statement is that the bank believes that early signs of strength in Canadian domestic demand “represents the bringing forward of household expenditures.” I would assume this is directed more to the latest housing figures we've seen, in addition to anecdotal evidence of a pick up in some auto sales because of incentives. In other words, the bank is not betting the farm on a quick snap back in demand and maybe a cooling off this summer. Stronger stock markets though and the recent slide in gasoline prices might just offer a lift.
Andrew Pyle, wealth advisor, ScotiaMcLeod

The economic and inflation assessments were changed a bit, and the bank now expects a little bit of a stronger performance on both fronts. The follow through for the output gap and inflation is that the bank now expects it to close a quarter sooner than the original forecast of [the third quarter of] 2011. But the overall risks to the inflation project are still “tilted slightly to the downside.” The hot issue for this meeting was how the bank would address the currency issues, as the Canadian dollar has firmed recently, though the spate of appreciation has not been as significant, nor as rapid as the intermeeting period [prior] to the June [announcement]. The bank did mention the Canadian dollar as a variable that “is significantly moderating the pace of overall growth.” The tone of this specific statement is not that dissimilar to the one in June, though the bank did not specify the drivers of the currency this time around. … It seems that the bank is now a little less dour on the outlook. That said, the currency remains a potential obstacle, and will continue to be watched very closely.
Charmaine Buskas, senior economics strategist, TD Securities

I don’t think there were any huge surprises here. But I think at the margin they come across as being a little bit more bullish on the growth outlook. That’s not a big shock. But just the tone of the remarks sounds a little bit more upbeat then I might have expected. They still signal the high dollar is weighing on growth but overall its got slightly more upbeat tone then I would have anticipated. I don’t see the changes to the forecast as being that surprising. There is no real surprise on the view for 2009 that’s basically consensus, the decline of 2.3% for GDP. But the call for the 3% growth in 2010 is an upgrade from where they were before and it’s well above consensus. The bank is now significantly more optimistic then most forecasters for next year.
Douglas Porter, deputy chief economist, BMO Capital Markets

We’re looking at a little stronger growth environment and a little less worrying inflation outlook ... or disinflation or deflation outlook perhaps. It’s a small step toward an eventual increase in interest rates but a small step, nothing significant.
Craig Wright, chief economist, Royal Bank of Canada

Our central bank said the recovery has started. We agree. The outlook for inflation and the economy still necessitates the firmly expansionary monetary policy to stay in place, which makes sense to us. However, [we think] the Bank of Canada is somewhat optimistic about the strength of the recovery, based on robust growth in household expenditures. We will learn more on Thursday in the monetary policy report.
Sébastien Lavoie, economist, Laurentian Bank Securities

Tuesday's policy announcement didn’t change anything that [the Bank of Canada] is doing, but the central bank is clearly less worried about the downside risks to growth. That degree of optimism, however, may understate the structural challenges to brisk growth abroad, and the risks to Canada from an overvalued exchange rate. ... The good news is that if the central bank has been too optimistic on 2010, it won’t really matter much for what the bank actually does. It will have plenty of time to observe actual growth and inflation conditions before making a decision to begin a tightening cycle.
Avery Shenfeld, chief economist, CIBC World Markets

Paul Vieira, with files from Reuters