(August 16 – 11:55 ET) – This morning’s Monetary Policy Report from the Bank of Canada held few surprises for economists.
It notes that core inflation continues to rise in the U.S., but suggests that past rate hikes appear to be beginning to bite. “There have been signs of slowing in interest-rate-sensitive sectors. Whether the slowing will be sufficient to reduce inflation pressures is not yet clear. Given the tight labour market, the balance of risks suggests continued upward pressure on U.S. core inflation.”
Strong U.S. growth has fueled demand in Canada, keeping our economy running at full throttle. The bank has revised its projection of real GDP growth for this year up to a range of 4.25% to 4.75%, “reflecting a strong first half in 2000 as well as upward revisions to output in the second half of 1999”. However it notes that core inflation came in below expectations, “suggesting that the economy’s capacity limits had not yet been reached”.
The bank expects to see a slowing in the second half, although it notes that the economy is still running ahead of potential output, so it expects to see core inflation rising to about 2% early in 2001. This is right in the middle of the Bank’s 1% to 3% operating band. The bank sees risk to the upside for inflation, but admits that capacity has proven to be bigger than expected and the limits remains somewhat uncertain.
As a result the bank will be keeping a watchful eye on inflation, but there is no indication that it feels the need to raise rates ahead of the Fed, or that it would sit back and let the Fed raise without matching its move. This watchful attitude should be buoyant for the dollar. Traders feared that a cool Bank attitude would emerge, indicating that the bank wouldn’t match the Fed, but that doesn’t appear to be the case.
-IE Staff