Bank of Canada keeps rates on hold

RBC Economics says that the accompanying policy statement from the BoC “pointed to the European sovereign-debt crisis as negatively affecting the economic outlook with the expected recession now expected to be ‘more pronounced’ than the BoC estimated in October.” However, it also noted more positive results in the United States and Canada.

“On balance, the tone of the statement is consistent with the current level of policy accommodation being maintained with the pressures from a slowing Europe offsetting economic strength in Canada and the US,” it says.

TD Economics says that the statement “strikes a slightly more dovish tone in line with the deepening Euro zone crisis”. However, it also sees the statement as consistent with its call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013.

“The BoC reminded markets that Canada has a target rate near historic lows, a well-functioning financial system and considerable monetary policy stimulus. Even with a heightened crisis in Europe recently, we continue to believe that barring a severe interbank funding problem the BoC’s preferred stance is to remain on the sidelines,” TD says.

“Until there are indications that these external pressures are abating, today’s statement suggests that the Bank of Canada will keep policy highly accommodative although the statement suggests that the Bank does not see a need to provide additional support,” RBC adds.

National Bank Financial says that developments in Europe over the next few weeks will be “crucial” in affecting interest rate expectations in Canada. “For now, today’s statement seems to have trimmed rate cut expectations somewhat, it says, noting that markets were pricing in close to 40 basis points in rate cuts by mid 2012, but that these expectations have been pared down in reaction to today’s decision.