Bank of Canada holds overnight rate at 1.0% and says substantial policy stimulus remains appropriate

(December 09, 2013 )

·         The Bank of Canada left the overnight rate unchanged at 1.0% as was expected.·         Maintained neutral bias despite highlighting greater downside risks to inflation outlook as overall balance of risks in same ‘zone’ as October.·         The Bank is seemingly balancing the downside risks to the inflation outlook with upside risks being generated from maintaining interest rates at very low levels. The statement itself put the greater emphasis on the downside risks to inflation. With respect to the growth outlook, until exports kick in, policy stimulus will be needed to support domestic demand. The improvement in the US sets up for the long-awaited rise in demand for Canadian exports to materialize with the sharp weakening in Canada’s dollar against the US dollar providing additional support. Increased demand for exports will be a key factor in boosting the economy’s growth rate above its potential in 2014 and reducing the amount of excess capacity. In turn, downside risks to the inflation outlook will ease.Throughout this process, the Bank is likely to maintain the policy rate at 1.0% in order to preserve the domestic economy’s momentum.Our forecast assumes that the output gap will be eliminated in the second half of 2015; at which time, the inflation rate will hit the Bank’s 2.0% target. To achieve this, the Bank is likely to maintain the overnight rate at the current 1.0% throughout 2014.