As expected, the BOC left its key rate unchanged at 1% in January. Correspondingly, the Bank Rate stayed at 1.25% and the deposit rate at 0.75%. The central bank also revised lowered its GDP forecast to 2% in 2013, down from previous estimate of 2.3%. The economy will reach full capacity in the second half of 2014 with GDP accelerating to 2.7% by then end of that year. Inflation is expected to average at +0.9% in 1Q13 and stay below +2% until 3Q14. The BOC forecast inflation would be at +2% by 4Q13. Canadian dollar slipped after the report as the central bank saw less urgency to hike interest rates.
Canada's economy slowed in 2H12 with a greater size than the BOC had anticipated, driven by "weaker business investment and exports" while consumer spending was also affected by high debt levels. Indeed, the country's GDP weakened to +0.6% (annualized) in 3Q12 and was "more pronounced than the Bank had anticipated" at the previous meeting, The BOC expects the economy to "pick up through 2013". Policymakers remained concerned about exports which are expected to stay "below their pre-recession peak until the second half of 2014" due to weaker overseas demand and "persistent strength" of CAD.
On monetary policy, the statement mentioned that "while some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2% inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated". Yet, the BOC remained the only G-7 central bank that forecasts a rate hike in the next move.
Canadian dollar fell to the lowest in 2 months as the BOC signaled that rate hike is less imminent. Separately, Mark Carney will leave his capacity as the BOC Governor in July to be the Governor of the BOE. Yet, he would still be the Chairman of the Financial Stability Board.