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The Bank of Canada today left interest rates unchanged, as had been widely forecast, its target overnight rate remaining at 1.0%, where it has been since September 2010, but warned in its statement that the downside risks to inflation have ‘grown in importance’ and that it expects inflation to remain ‘well below target for some time.’
While Governor Stephen Poloz stopped short of adding any wording to the central bank’s statement of explicit guidance for lower rates as a future step, but did include a phrase saying ‘the timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.’ The balance of risks refers to household imbalances, which have not materially changed since the last policy meeting, and the downside risks to inflation. Mr Poloz explained that ‘we now believe the effect of heightened retail competition will subtract about 0.3 percentage points from core inflation in 2014. This effect will be more persistent than initially thought.’
So long as the Bank of Canada harbours such concerns over low inflation, the next change in Canadian interest rates is likely to be lower rather than higher.
There was further dovish language in the central bank’s monetary policy report, with a clear implication that a weaker currency would be welcome for the beneficial effect it would bring to exports. ‘Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports,’ the report said.
By mid-afternoon in New York, USD/CAD had risen more than 1% to 1.1080, reaching its highest level today since early September 2009.