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BoC surprised with holding and will stay on hold - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 21, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Guatemala) - Analysts at Nomura noted that the BoC keeps policy rate unchanged, conceding defeat on its power to help the economy.

    Key Quotes:

    "Against our expectations, the Bank of Canada (BoC) left its policy rate at 0.50%. The BoC noted that “the risks to the profile for inflation are roughly balanced” and that “the Bank’s Governing Council judges that the current stance of monetary policy is appropriate”, suggesting a neutral policy stance and that the BoC is not considering further easing."

    "On growth, the BoC noted that “prices for oil and other commodities have declined further and this represents a setback for the Canadian economy."

    "GDP growth likely stalled in the fourth quarter of 2015, pulled down by temporary softness in the U.S. economy, weaker business investment and several other temporary factors."

    "The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016.” As a result, the BoC has lowered its GDP growth forecast for 2016 to 1.5% from 2.0%, delaying the closing of the output gap."

    "However, what is the most surprising is that the BoC expects growth of 2.4% in 2017 and the output gap to be closed by the end of 2017. This suggests that growth rates at end- 2016 and 2017 need to be close to 3.0% for that to happen. This seems slightly inconsistent with comments made by the Governor earlier this year, suggesting that the adjustment to lower oil prices will take years. However, it is impossible to confirm because the BoC did not provide a quarterly forecast profile beyond H2 2016, as it would normally have done."

    "On inflation, the BoC said that “inflation in Canada is evolving broadly as expected” and adds that “the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods.” This suggests that the BoC views the impact of the wider output gap for longer as counterbalanced by stronger upside pressures on inflation from the currency’s further depreciation. However, given the big downside risk to growth, one would have expected the balance of risk on inflation to be tilted to the downside, similar to a year ago."

    "The BoC also added that "the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget." This could signal that a very large fiscal stimulus should be announced soon."

    "Overall, today’s decision, indicates that the BoC seems to be suggesting there is not much it can do to help the economy. We believe there could be two explanations for the surprising decision. 1) The BoC has been told by the government that a large fiscal stimulus is on its way and that it will be big enough to limit downside risks to the growth outlook. 2) The BoC believes that the risk to financial stability from a rate cut outweigh the positive impact it would have on growth. In any case, both suggest that the BoC believes that the effectiveness of monetary policy is very low. At this point it is tempting to say that the cut will only be delayed, but today’s decision suggests that the hurdle for the BoC to provide further stimulus is much higher. As such, we believe the BoC will remain on hold, leaving fiscal policy to stimulate the economy."
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