Bank of Canada on Hold as Domestic and U.S. Demand Cools

This week will kick off with the Bank of Canada’s (BoC’s) policy rate meeting on October 19 (Tuesday) followed by the publication of the bank’s Monetary Policy Review (MPR) on October 20 and the release of key inflation and retail sales statistics on Friday (October 22). Consensus has now aligned with our view that the BoC will remain on hold given the recent softening of economic indicators in Canada and the slowing of the global economy.

Looking forward, the BoC faces a complicated environment, with the Fed set to announce another round of quantitative easing (QE2). Even before any announcement, market expectations have pushed up risky assets (including commodity prices) and the Canadian dollar, which again touched parity with the USD last week, for the first time since April. A strong Canadian dollar may do some of the BoC’s work for it, by taming imported inflation. With domestic demand still soft and the output gap narrowing slowly, we maintain our view that Canadian interest rates will remain on hold for the rest of the year. We expect the MPR to bring down the bank’s growth estimates from the July issue, as the federal government’s Economic Update did last week for 2011 growth.

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: North America Focus: U.S.: Fed Debates Unemployment; Bank of Canada and Consumers on Hold?

All rights reserved, Roubini GlobalEconomics, LLC

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