Bank of Canada Unexpectedly Holds Rates, Delivers Hawkish Commentary
Surprising both economists and market participants, the Bank of Canada announced a quick end to its recently aggressive pace of policy easing. Against heavy forecasts of a quarter percentage point rate cut to 2.75 percent, the central bank actually stood pat at 3.00 percent. This was a surprising turn of events considering the last two policy meetings were met with 50bp rate cuts; and both growth and inflation trends have flagged in the most recent round of data. In fact, April's consumer inflation report marked headline price pressures at 1.7 percent and the core equivalent at 1.5 percent - both well below the 2.0 percent target. However, this lagging data was certainly not what the central bankers foresaw over the coming months and years. Instead, the BoC policy statement that accompanied the rate decision was decidedly hawkish.
Many comments in the bank's forecast were dramatically different from the previous meeting's rhetoric; and overall, the report took on a decidedly hawkish outlook on both growth and inflation conditions. Despite the recent lull in price pressures, the BoC said they would monitor inflation closely going forward. What's more, projections of core CPI under 2 percent through 2009 and nearer trends skewed 'slightly' to the upside apparently would not curb the noted threat that headline inflation rise above 3.0 percent in 2008 should energy prices continue to rise. The growth outlook similarly took a sharp turn. The statement suggested that the 'many' downside risks to expansion had eased over the past few months. Similar to the upside revision to inflation, the projection for growth over 2008 was higher while that expansion would accelerate through 2009. Even credit conditions were considered to be evolving as expected. To further confirm the Bank of Canada's intentions to stay pat over the near term, the group borrowed from the ECB playbook when they referred to their policy rate as 'appropriate accommodative' after their short-lived easing regime.