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Top 6 takeaways from the Bank of Canada’s decision

Get ready … you may want to keep tabs on this article for your future investment projections. The Canadian dollar has surged past the US dollar from US 0.96 to US 1.0099, hinging on the fact that the bank’s assessment of the economy is far more positive than just a month ago. This led the Bank of Canada to hike its 2012 growth projection to 2.4% from 2% in January.

What does this mean? Look for increases to come sooner than expected as our economy continues to grow steadily.

 

Top 6 takeaways from the Bank of Canada’s decision
written by Eric Lam

Governor Mark Carney and the Bank of Canada, as expected, maintained interest rates at a stimulus-level 1% Tuesday. However, Mr. Carney’s comments send the clearest and most hawkish signal yet that rates will be moving higher — but precisely when remains to be seen.

The dollar surged, rising US0.96¢ to US$1.0099, as markets keyed on a passage in the bank’s statement that said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

This hinges on the fact that the bank’s assessment of the economy is far more positive than just a month ago, and led the bank Tuesday to hike its 2012 growth projection to 2.4% from 2% in January.

“The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments,” Mr. Carney said.

Derek Holt, an economist at Scotia Capital, said the central bank has become more hawkish, but still has plenty of wiggle room left in which to manoeuvre and will likely hike rates sooner than his forecast of the third quarter of next year.

• The global outlook is on the upswing

Since the bank released its January Monetary Policy Report, there have been signs of improvement around the world. Europe is now expected to “emerge slowly from recession” in the second half of the year, although the risks remain high. The U.S. is benefiting from somewhat improved labour markets, financial conditions and confidence, as well as fiscal consolidation and household deleveraging. Meanwhile, emerging-market economies will “moderate to a still-robust” pace supported by an easing of macroeconomic policies.

• Canada’s economy firmer than expected; 2012 growth boosted

The bank has hiked its GDP forecast for 2012 higher, to 2.4% from 2.0%. “The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated,” the bank said. “As a result, business and household confidence are improving faster than forecast in January.” Mr. Carney expects domestic demand and consumption to remain the primary driver of the economy, again warning that household debt burdens are still the biggest domestic risk. Business investment will remain robust, but government spending contributions will be modest.

• But 2013 growth will slow

On the other hand the bank has also trimmed its forecast for 2013 growth to 2.4% from 2.8%, returning to full capacity in the first half of that year, while maintaining a 2.2% outlook for 2014. “The BoC is signalling that it does not expect growth to materially outstrip potential growth, or the speed limit of the economy,” Mr. Holt said. “While spare capacity may close in 2013H1 it won’t trip materially into excess demand that would spark deeper inflation concerns. That’s why the guidance here is toward ‘modest’ rate hikes.”

• Speaking of inflation

Mr. Carney also characterized inflation as “somewhat firmer than anticipated” in January. Total CPI inflation is expected, along with core inflation, to be around 2% for the foreseeable future. This fits with the more hawkish tone, as Mr. Carney had previously forecast inflation to ease to 1.7% for both headline and core by the fourth quarter, Mr. Porter said. “The bank is clearly uncomfortable with keeping interest rates below inflation when household debt continues to grind higher.”

• The loonie will be a factor

The loonie, meanwhile, is spiking higher, up a penny and rising. Mr. Holt suspects that fiscal tightening has not been priced into the dollar and its movements will be a limiting factor on the BoC’s policy flexibility.

• Commodities are still elevated

Improving global economic prospects, supply disruptions and geopolitical risk have also kept commodities prices higher, particularly oil. However, international oil is now “considerably higher than that received by Canadian producers” — a possible reference to the supply bottleneck at Cushing, Okla. that has contributed to the price gap between North American crude and London Brent. “If sustained, these oil price developments could dampen the improvement in economic momentum.” As well, exports will remain constrained due to the persistent strength of the dollar.

The BoC’s next MPR, which includes full updated outlooks on the economy and inflation, will be published on Wednesday. The next rate decision will be in June.

With files from Postmedia News

Read the original article here:
http://business.financialpost.com/2012/04/17/boc-rate-decision-key-takeaways/

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