Bank of Canada leaves rates unchanged - TD Economics

TD Economics

 Bank of Canada leaves rates unchanged, dovish tone maintained

• The Bank of Canada held its benchmark overnight rate at 1.00% today, as was widely expected. Its communiqué was broadly consistent with the diminished outlook seen in September’s interest rate announcement and silences any debate about rate cuts.
• The Bank reiterated that that several downside risks in the last MPR have been realized, and there has been a generalized retrenchment in risk-taking across global markets.
• It expects the euro area to experience a brief recession. Its base-case outlook also assumes the euro-area debt crisis will be contained, while acknowledging this outcome has significant downside risks.
• As for the U.S., the Bank expects weak real GDP growth through the first half of 2012, before strengthening thereafter, in line with our own forecast.
• Growth in emerging markets is expected to “moderate to a more sustainable pace”, and combined with recent declines in commodity prices are expected to “dampen global inflationary pressures”.
• The Bank did update its headline growth numbers that will be fleshed out in more detail in tomorrow’s Monetary Policy Report, stating that it now expects Canadian GDP growth to post a 2.1% pace in 2011, 1.9% in 2012, and 2.9% in 2013. That outlook is weaker than the last MPR in July, and is remarkably in line with our own forecast.
• The Bank predicts core inflation will be slightly softer than previously envisaged, implying it views the recent acceleration in core inflation as temporary.
• The Bank characterizes growth as having rebounded in Q3, but underlying momentum has slowed and is expected to remain modest through the middle of next year, as a less favourable external environment affects Canada through financial, confidence and trade channels. Domestic demand is expected to remain the principal driver of growth, although “modest” consumer spending and “solid” business investment are both expected to be more subdued than before.

Key Implications

• Today’s communiqué essentially reiterated the more dovish tone of September’s rate announcement. It is also consistent with our call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013.
• The Bank reminded markets that Canada has a target rate near historic lows, a well-functioning financial system and considerable monetary policy stimulus. This should quiet any talk of rate cuts, which markets had started to price in during the worst of the recent market turmoil. However, in removing any reference to the withdrawal of monetary stimulus, markets have initially interpreted the statement as more dovish.
• All told, today’s statement confirms our view that given the downgraded global growth outlook, and greater economic slack in the Canadian economy than previously expected, interest rates will need to remain accommodative for quite some time. Our Bank of Canada call implies a flat overnight rate for over two years – an unprecedented situation which underscores the fragility of the economic recovery.

Leslie Preston, Economist

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TD Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

United States

•    European leaders are meeting in Brussels this weekend to try and come up with a plan to restore market confidence and secure the future of the common currency. But those hoping for a grand bargain are likely to be disappointed.

•    The real challenge is deeper than European policymakers have publicly acknowledged: how do you restore confidence in a union of countries that, with few exceptions, are highly indebted and relatively uncompetitive? A successful solution must involve the reform of European institutions themselves, as well as an understanding among member states over the responsibilities they hold to themselves and to each other.

•    The U.S. financial system, and the broader economy, will remain at risk as long as doubts linger over Europe’s future. Although the economic recovery has proven stronger than many had feared, the risk is that troubles in Europe throw it off course.

 

Canada

•    Europe’s debt crisis has had a severe impact on Canadian financial markets in recent months.

•    In addition to double-digit declines in equity markets and the Loonie, increasing concerns about counterparty risk and contagion effects have led to increased interbank funding costs.

•    Fortunately, the escalation in financial volatility has not yet led to significant downgrades to the Canadian economic outlook, but a key risk lies in whether or not European leaders can contain the crisis.

•    If control is lost, a systemic European banking crisis could spread to Canada and lead to an economic and financial environment similar to that of 2008 during the fall of Lehman Brothers -- but unlike 2008, both households and governments are too indebted to spend their way out of a full-scale financial crisis.

 

 

Webcasts:

 

Canada:  https://www.brainshark.com/tdeconomics/vu?pi=zGPz13Z8N3z1sQYz0

 

 

United States:  https://www.brainshark.com/tdeconomics/vu?pi=zGNzEa2MPz1sQYz0

 

October 18, 2011 - Residential Market Update

 

 

 

Ginette Nason Account Manager Golden Horseshoe T: 905.630.2794 E: ginette.nason@firstnational.ca         Residential Market Update     Canada Mortgage Bonds         Our Partners      Canada Housing 5 yr : 1.88%         Market Commentary   Bond yields today are roughly where they were a week ago but there has been plenty of volatility over the intervening period. Last week yields were pushed higher by in-line or better than expected economic data in Canada (Manufacturing Sales Growth, Trade Balance) and the US (Retail Sales Growth, Initial and Continuing Jobless Claims, Trade Balance), together with a sense of optimism that the European debt crisis will be resolved and/or that concerted steps there would be taken to protect the banking system. Generally speaking, "good" economic news tends to push bond yields higher as market participants are less interested in the safety bonds provide. Notwithstanding last week's developments, yields have come back down today as worse than expected economic data in the US and a clarification from Germany that a once-and-for-all solution to Europe's debt crisis will not be forthcoming and that markets should expect such crisis to extend into next year. In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change. Are you going to CAAMP? Use your Wizard Rewards dollars towards your CAAMP registration. Simply go to the conference site conference site,follow the steps and select Rewards as your method of payment. Don't wait, register now! The CAAMP offer expires Friday, October 28 2011. Early bird registration is Friday,October 21 2011.       Financing Tips   Canadian homeowners look for new property within two years of purchasing their first home. Ontario was the province with the highest percentage of repeat buyers at 71% moving on to a larger or more luxurious home. Post client home financing is key to keeping up a relationship for repeat business. In this case clients want more. Sooner! So keep in touch.     unsubscribe | privacy policy | disclaimers © First National Financial LP 100 University Avenue, North Tower, Suite 700, Toronto, Ontario M5J 1V6. First National is licensed under the Mortgage Brokers, Lenders and Administrators Act 2006 (Ontario) Licence No. 10514