The Canadian dollar held onto gains made versus its US counterpart after strengthening across the board in reaction to the Bank of Canada’s decision to leave its benchmark interest rate on hold at 0.75 percent.
The BoC cited “inflation is now more balanced” and current degree of policy stimulus remains “appropriate”.
Total CPI inflation in Canada has fallen as expected, reflecting the significant drop in oil prices. Core inflation remains close to 2 per cent and continues to be temporarily boosted by the pass-through effects of the lower Canadian dollar, as well as sector-specific factors.
The global economy is evolving broadly in line with projections in the Bank’s January Monetary Policy Report (MPR). The United States remains the main source of momentum in the global economy, while headwinds to growth linger in many regions. In this context, a growing number of central banks have taken actions to ease monetary conditions. Crude oil prices are close to the Bank’s MPR assumptions.
Canadian economic growth in the fourth quarter of 2014 was consistent with the Bank’s expectations. The oil price shock had a modest early impact on aggregate demand, and a larger effect on income.
Financial conditions in Canada have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments. These conditions will mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment.
In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected in January.
After the announcement on Wednesday, the Canadian dollar rallied against its major counterparts. This pushed the dollar/cad to 1.2406.
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