• As was highly expected, the Bank of Canada (hereafter referred to as “the Bank”) held its benchmark overnight rate at 1.00% today; this rate has now been at this level since September 2010.
• In staying put, the Bank concluded that while the global economic recovery was indeed forging ahead, risks continue to linger in the background.  Examples of such risks referenced in the communiqué include: (1) elevated commodity prices over the near term; (2) the European sovereign debt crisis that has seen volatility in financial markets of late; and (3) building inflationary pressures in emerging markets.
• The Bank also points to moderate economic growth recorded south of the border so far this year.  Going forward, it expects such a pace to continue over the near term.  The same modest showing is anticipated for the Europe region as many countries impose fiscal austerity measures.  
• Here at home, the Bank expects a subdued economic performance over the next few years.  The rotation in growth drivers from government and consumers to exporters and business investment has taken longer than the Bank originally anticipated.  Looking to the second half of the year, growth is expected to accelerate.  More precisely, the Bank’s forecasts in household spending have been ratcheted up, but export growth has been inched down.  All told, the Bank projects growth of 2.8% in 2011, 2.6% in 2012 and 2.1% in 2013, with the national economy returning to full capacity by mid-2012. 
• The communiqué acknowledges that monetary stimulus must be withdrawn.  This time around, the term “eventually” was dropped before “withdrawn”, signaling that it is a matter of time before the Bank begins increasing its benchmark target.   

Key Implications

• At the beginning of the year, many private sector forecasters including us had expected the Bank to resume hiking its overnight rate this month.  However, global fiscal risks are heightened and economic growth in the U.S. has been sub-par to date.  With this in mind, we recently changed our call to January 2012.  Today’s communiqué confirms that monetary stimulus will soon come to an end.  Still, the timing of such withdrawal must be judged in context with global economic developments, how the domestic economy plays out, and any underlying risks. 
• The global risks on the radar cited are largely unchanged from the Bank’s last communiqué.  However, these same concerns continue to be front and centre when assessing how the global economic recovery will unfold.
• While more details will be released in tomorrow’s Monetary Policy Report, the Bank’s economic growth forecasts match those included in our June Quarterly Economic Forecast.
• Our January 2012 interest rate call will help avoid interest rate spreads from growing between the U.S. and Canada.  Timing the two dates close to one another should help keep a lid on the Canadian dollar over 2011-12.  Yet, we expect it to continue to hover near parity over this period.
• Consistent with our own views, headline inflation is expected to be near 3% over the next little while.  Higher commodity, food and energy prices on tap should underpin such a showing.  Core CPI, on the other hand, is poised to be more muted and should come in near 2%, well within the Bank’s inflation target range.