The Bank Of Canada Surprises Market With A Rate Cut, Dour Forecasts

Against expectations from market participants and economists, the Bank of Canada’s monetary policy group voted to cut the nation’s benchmark lending rate by 25 basis points to 4.25 percent. This represents the first cut to the overnight rate since April of 2004. The support for such a dramatic turn in policy has been gaining as Canadian business leaders have lobbied policy makers to take action as an oppressive currency exchange rate has cut into demand, cooling growth in the US has depressed exports to its largest trade partner and deteriorating credit conditions have slowed investment and overall business activity. The policy group made note of each of these issues in the brief statement it releases along with its rate decision.

The central bank’s growth remained rather optimistic. The group noted that “global economic expansion has remined robust and commodity prices have continued to be strong.” They also remarked that doemstic growth has been growing broadly in line with their forecasts - due largely to strong domestic consumption trends. However, the growth wrap up wasn’t without its detriments. For the vital exports sector (accounting for an estimated 30 percent of the country’s output), a warning of “increased risk to the prospects for Canadian exports,” thanks to cooling demand from the US, presented a credible threat to upbeat forecasts. Another discouraging factor for central bank growth forecasts were the “global financial market difficulties.” The bank noted rising funding costs and tighter credit conditions and projected these unfavorable conditions to "persist for a longer period of time."
Growth forecasts aside, the inflation scenario seemed to be what pushed the BoC to its cut. While policy makers made an effort to make note of existing upside risks to their inflation projections, they also stated that both headline and core inflation were below their expectations. The broadest measure of consumer-level price growth was set at a 2.4 percent clip, while the preferred core figure pulled back below 2.0 perecnt to 1.8 percent. According to their observations, this was partly due to the high level of the Canadian dollar and its sharp appreciation over the past few months. Offering forecasts on inflation, the central bank forecasted "inflation over the next several months to be lower than was projected in the MPR."
In the minutes after the release, USDCAD rallied over 120 points, CADJPY plunged 125 points and EURCAD jumped 150 points - marking the surprise the cut wrought. Click here to read the Bank of Canada’s statement.