The Bank of Canada released the fairly hawkish statement following its interest-rate decision saying that economic growth – domestically – is stronger than previously expected and that some of the downside risks from the global economy have abated.
The bank raised its forecast for 2012 growth to 2.4% from 2.0%.
At the same time the bank judges that the degree of economic slack in the economy is also smaller than the bank has anticipated back in January which attributed to a more firmer expectation for inflation.
As a result “some modest withdrawal of present considerable monetary policy stimulus may become appropriate.”
The market had expected a more up-beat tone and by the central bank following strong employment and housing data of late, but the language was more hawkish than anticipated and helped give a strong boost to the Canadian dollar against key rivals.
He are some excerpts from the BOC statement:
“Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated.”
“As a result, business and household confidence are improving faster than forecast in January.”
“The degree of economic slack has been somewhat smaller than the Bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.”
“As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer than anticipated in January.”
“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”
The OIS market is pricing in 70% probability of a 25 bps rate hike by the end of the year, up from just one-third up until yesterday, said Mark Chandler, head of Canadian fixed income and currency research at RBC Capital Markets. The market has almost fully priced in a rate hike by January 2013.
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