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The Governing Council of the Bank of Canada has decided to remain vigilant without implementing any transformational changes. Therefore, the final decision was to keep the interest rate at the previous rate of 1.75 per cent, as the central bank continues to monitor the development of the ongoing trade spat between the US and China.
As we have projected in our weekly expectations article, a possible reduction of the rate seemed almost impossible, whereas the implementation of no changes at all appeared like the most likely outcome despite there being also a possibility for an early hike of the rate (for more information click here).
In that weekly expectations article, the core arguments that were presented in support of BOC's eventual decision were the underlying Inflation above the desired 2 per cent symmetrical level and the rising consumer confidence index that is being influenced by the observance of gradual economic growth. In Wednesday's monetary policy statement, the Governing Council had this to say in support of their final decision:
“Following the temporary weakness in late 2018 and early 2019, Canada’s economy is returning to growth around potential, as expected. […] Growth in the second quarter appears to be stronger than predicted due to some temporary factors […]. Consumption is being supported by a healthy labour market. ” [source]
Commenting on the current state of Canadian Inflation, however, the BOC took a somewhat surprisingly mild stance by maintaining that:
"Inflation remains around the 2 per cent target, with some recent upward pressure from higher food and automobile prices. […] CPI inflation will likely dip this year because of the dynamics of gasoline prices and some other temporary factors. […] Inflation is expected to return sustainably to 2 per cent by mid-2020."
These remarks imply that the BOC does not perceive the recent rise of the inflation rate as something out of the ordinary, and if the Governing Council still maintains this view through early September, the possibility of a rate hike during the next BOC monetary meeting becomes markedly diminished. It was finally noted that:
“Recent data show the Canadian economy is returning to potential growth. However, the outlook is clouded by persistent trade tensions.”
Overall, if the global economy continues to grow continuously at its current pace, and thus, the growth rate remains undisrupted through the 6th of September (the time of the next BOC meeting), the Governing Council would have little to know reasons to implement any transformational changes to its monetary policy.
On the other hand, at the present rate, the central bank remains determined to continue monitoring the appreciated inflation rate, but is reluctant to implement more drastic adjustments to the underlying monetary policy, as the reasons which led to the rise are only temporary, according to bank’s officials. If the rate does not depreciate back to the target level by the 6th of September, however, there would be a more compelling case to be made in favour of a rate hike, in favour of supporting price stability.
Following the release of the monetary policy statement by the BOC, the Canadian dollar found renewed strength and thus, the USDCAD pair depreciated with 0.35% in the daily trading session. In doing so, the currency pair reverted below the fundamentally important support level at 1.30990
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