Bank of Canada's overnight rate target stable at 1%

Recently, the Bank of Canada announced it wants to achieve an overnight rate target of 1.0%. Likewise, the target for the bank rate would be 1.25% and 0.75% for deposit rate.

While the economic situation globally is somewhat feeble compared to the bank's predictions in  October MPR, risks relating to global tail have weakened. Simultaneously, the worldwide tail risks have reduced. In the US, the pace of the economic development is gradual, controlled by constant reduction in public plus private debts, worldwide failings and indecisions concerning fiscal conciliations. A noticeable enhancement in tangential sovereign debt markets notwithstanding, recession continues in Europe. Despite a slowdown in fiscal activity in other key rising economies, China is experiencing growth. Fiscal conditions are further encouraging in Europe owing to positive policies and support from the central banks. Merchandize prices have been very high. While short-term disturbances plus constant traffic jams have resulted in unprecedented price cuts of Canadian heavy crude.

The recession in Canada during the latter half of 2012 has been more distinct compared to the Bank's expectations due to weaker exports and business investments. Household expenditure has been restrained owing to concern over elevated debt levels. The Bank hopes that the economic growth will accelerate during 2013, as it is expected that exports and business investments would recover with improving foreign demands. However, exports will still be below the peak during pre-recession till the latter half of 2014. However, it is hoped that consumption will grow reasonably, while investment on residential property will further weaken from the traditionally elevated degrees. The Bank anticipates that the growth trend in household credit to be more reasonable, as the debt-income ratio will stabilize close to the existing levels.

Economic activity in Canada too is likely to be further restrained compared to the October MPR. Subsequent to a projected 1.9% in 2012, it is expected that the economy will grow by 2.0% during 2013 and by 2.7% in 2014. The Bank anticipated the economy to attain total capacity during the latter half of 2014, further than the October MPR projections.

The basic inflation has reduced more than the Bank's expectations. In addition, the sum CPI inflation has been less than expected, revealing developments in basic inflation and the gasoline prices being lower than anticipated. It is expected that total CPI inflation would be roughly 1.0% in future prior to increasing steadily to the target of 2.0% during 2014 second half, as the economy will be back to full capacity, while inflation anticipations would be secure.

Considering the above aspects, the Bank has taken a decision to hold on to its overnight rate of 1.0%. While it is likely to require withdrawing some modest monetary policy incentives over time, in agreement with attaining the 2.0% inflation target, a further subdued inflation attitude and the commencement of an additional constructive fruition of discrepancies in the residential sector hint that contrary to earlier projections, there is less chances of any withdrawal of this kind taking place right now.

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