Bank of Canada statement highlights:

  • Stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment
  • Recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income
  • Economy will return gradually to capacity over the next two years vs previously “a gradual return to full production capacity around the end of 2015.”
  • Data consistent with a soft landing in housing

Little change in the key line:

Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.

Highlights of the Monetary Policy Report:

  • Lower inflation forecasts throughout 2014
  • Projects total inflation to average 0.9% in first quarter
  • US growth outlook for 2014 hiked to 3.0% from 2.5%

USD/CAD was trading at 1.0974 moments before the decision and jumped to 1.1017 afterwards. What’s grabbed the market’s attention is the lower inflation projections in the Monetary Policy Report, they’re significantly lower this year.

  • Q1 core 1.0% vs 1.3% in Oct
  • Q2 core 1.2% vs 1.5% in Oct
  • Q3 core 1.3% vs 1.6% in Oct
  • O4 core 1.5% vs 1.7% in Oct

Interestingly, they’re forecasting some larger declines in oil prices with WTI forecast at $89 at year end vs $95 previously.

There’s a technical note entitled “The persistent strength of the Canadian dollar”:

“Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports” but that it will lead to “a stronger performance in the trade sector.”

“The depreciation of the Canadian dollar in the past year is also expected to exert upward pressure on inflation,” the BOC added. They say the “depreciation likely reflects the improved growth prospects in the United States, as well as reduced safe-haven effects that had pushed the Canadian dollar higher in the aftermath of the global financial crisis.”