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The Bank of Canada left the overnight rate unchanged at 0.75% after a 25 basis point cut on January 21, 2015.

·           The Bank sees inflation risks as “more balanced” given the easing in financial conditions seen since January. Financial stability risks were noted to be “evolving as expected.” While the Bank has shied away from forward guidance, today’s statement seemed to indicate an implicit neutral bias.

·           The prospect of an additional cut at today’s meeting was significantly diminished following Governor Poloz’s speech on February 24, 2015, in which he noted that the January cut “buys us some time to see how the economy actually responds” to the oil price shock. Today’s rate announcement was consistent with that assessment as easier financial conditions were seen as contributing to “more balanced” risks around the inflation profile and an “as expected” evolution in financial stability risks. The Bank has shifted to more of a neutral policy stance, but, should upcoming data indicate a significant slowing in activity or increased downside risks to its inflation profile, another rate cut is not off the table. We will publish our updated interest rate forecasts in our Financial Markets Monthly this Friday, March 6, 2015.

The Bank of Canada left the overnight rate unchanged at 0.75% on March 4, 2015 after surprising markets with a 25 basis point cut at its previous meeting in January.

Since the Bank’s January Monetary Policy Report (MPR), the economic outlook has evolved roughly as expected with fourth-quarter 2014 gross domestic product (GDP) growth of 2.4% (compared with the Bank’s 2.5% assumption) and core inflation at 2.2% in January (holding slightly above the Bank’s 2.0% forecast for the first quarter of 2015). The Bank continues to note that core inflation has been boosted by pass-through from the weaker Canadian dollar as well as “sector-specific factors” (meat, communications, and clothing and footwear were cited in the January MPR). The decline in headline inflation, as expected, was attributed to falling oil prices.

The Bank had a positive assessment of growth in 2014 as a whole with rotation toward non-energy exports and investment seen as “well underway.” Importantly, however, the effect of lower oil prices on the Canadian economy remains to be seen, with much of the drag on growth expected to come in the first half of 2015. The statement noted that the negative effect “may be even more front-loaded than projected in January,” and thus, the Bank’s forecast for 1.5% annualized growth in the first and second quarters of 2015 may be tweaked in April.

The statement noted that financial conditions “have eased materially since January” in response to the Bank’s January cut as well as “global financial developments,” including easing by a number of other central banks. Further weakening in the Canadian dollar, currently around US$0.80 rather than the $0.86 assumed in January, has also contributed to an easing in financial conditions. The Bank noted that this easing will “mitigate the negative effects of the oil price shock” and boost growth through stronger non-energy exports and investments.

The Bank of Canada surprised markets with a 25 basis point cut in January, which was aimed at providing a measure of “insurance” against the negative net effect of lower oil prices on the Canadian economy. Given the Bank’s emphasis on risk management and with oil prices remaining slightly below the $55/barrel of West Texas Intermediate (WTI) assumed in its forecast, expectations were that further easing would soon follow. The prospect of an additional cut at today’s meeting, however, was significantly diminished following Governor Poloz’s speech on February 24, 2015, in which he noted that the January cut “buys us some time to see how the economy actually responds” to the oil price shock. Today’s rate announcement was consistent with that assessment, as easier financial conditions were seen as contributing to “more balanced” risks around the inflation profile and an “as expected” evolution in financial stability risks. The Bank has shifted to more of a neutral policy stance, but, should upcoming data indicate a significant slowing in activity or increased downside risks to its inflation profile, another rate cut is not off the table. We will publish our updated interest rate forecasts in our Financial Markets Monthly this Friday, March 6, 2015.

Josh Nye, Economist, RBC Economics

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