Need a Bank of Canada Translation?

The Bank of Canada issues its interest rate decisions eight times a year in the form of written statements that explain its policy, describe the current state of the economy and inflation and predict their future course. Like those of the Federal Reserve Board, the Bank of Canada statements are concise and to the point.

 

What the Bank of Canada said:

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 2 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 3/4 per cent.

What it meant:

The Bank Rate, which is the rate of interest that the Bank of Canada charges on one-day loans to financial institutions has dropped by 25 basis points. That means a slew of financial institutions across the country are likely to be lowering the interest rate one money they borrow and lend, because many of these rates are tied to the Bank Rate.

The operating band is a 50 basis point range for the overnight rate, which is the rate at which major financial institutions lend money amongst themselves. The Bank rate is traditionally at the higher end of the operating band.

 

What the Bank of Canada said:

Both core and total CPI inflation remain below the 2 per cent inflation target. While inflation is exhibiting some volatility, underlying price pressures and the presence of spare capacity point to a core rate of inflation that will likely persist below the inflation target late into 2005.

What it meant:

Unlike the U.S. Federal Reserve Board, which has no publicly announced target, The Bank of Canada has set a 2 per cent target for core inflation (inflation excluding eight volatile items such as fuel, fruit and so on). When inflation looks like it is going to be significantly higher or lower than 2 per cent for an extended period off time, the Bank of Canada is likely to act. It will either raise rates, to choke off demand, if inflation is too high, or will lower rates to stimulate consumption if inflation gets too low.

 

What the Bank of Canada said:

Despite stronger global economic growth, the rapid appreciation of the Canadian dollar against the U.S. currency has cut into the overall growth of aggregate demand for Canadian goods and services through weaker exports and increased imports.

In addition, although employment growth has continued to be vigorous, recent indicators of domestic demand in the fourth quarter of 2003 have been somewhat weaker than projected. As a consequence, the output gap at the end of 2003 appears to be somewhat larger than the Bank was expecting.

What it meant:

The Bank of Canada continues to be worried about the "output gap," which is basically excess capacity in the economy. This terminology hints that over the long-term, if the output gap persists and inflation does not pose to direct a threat, the Bank of Canada might consider lowering interest rates even further than today's 25 basis point cut, to stimulate domestic demand.

 

What the Bank of Canada said:

In light of these demand and inflation factors, and the likelihood that they will persist through this year and into 2005, the Bank has decided to lower the target for the overnight rate to provide additional support for growth in aggregate demand and thus help return inflation to the target over the medium term.

What it meant:

The key phrase here is "the likelihood that (these factors) will persist through this year and into 2005." Monetary policy is a very inexact science and can take many months for its effects to flow through into the economy. The Bank of Canada is thus less likely to react to short-term trends, knowing that businesses and consumers prefer stability.

What the Bank of Canada said:

An elaboration of the Bank's views on the outlook for inflation, the economy, and the uncertainties surrounding aggregate demand growth will be provided in the Monetary Policy Report Update, to be released on 22 January 2004.

 

What it meant:

The Bank of Canada releases two monetary policy statements each year, in April and October, in which it describes how it sees the economy. It also releases updates to these statements in January and July. Economists study these statements closely to help them guess the likelihood of further Bank moves.

 

peter@peterdiekmeyer.com

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