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BoC Decision: Lower for Even Longer

Canadian macro-economists are mostly in agreement that the overnight rate should go nowhere in the next 9-12+ months. And the Bank of Canada gave no indication today that such projections are off the mark.
The Bank left Canada’s core lending rate unchanged at 1% for the 29th straight month, with no change in sight.
Part of the Bank’s reasoning is reflected in these comments from its statement:
  • “Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs...”
  • “The Bank expects…the debt-to-income ratio [to stabilize] near current levels.”
  • “…Residential investment is expected to decline further from historically high levels.”
  • “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”
For an excellent deciphering of the Bank’s press release, click here.
Today’s announcement shed little new light on the timing of the next prime rate change. Of course the BoC is still suggesting that the next rate move is up, but others, like David Madani of Capital Economics, aren’t so sure.
On Sunday, Madani said the "inevitable" rate hikes that so many predict could actually be pre-empted by policy loosening. He noted:
“Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market's ruling out of interest rate cuts makes little sense.”
For now, as long as the 5-year bond yield stays under or within the psychological 1.50% to 1.60% range, there’s little danger of any notable rise in rates. After this morning's rate announcement, bond yields remained flat at 1.32%.
The next BoC rate meeting is April 17.

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