CURRENCY

The country's more dovish monetary policy is having an effect not only on growth forecasts for 2013, but on the health of the Canadian dollar, writes David Dittman of Canadian Edge.

The Canadian dollar dipped below parity with the US dollar for the first time since mid-November 2012, after the Bank of Canada (BoC) held the target for its overnight rate at 1% and signaled a more dovish stance than had been articulated in previous monetary policy announcements.

Concluding its January 23 statement, the BoC noted, “While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2% inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.”
 
The BoC has held its benchmark rate at 1% since September 2010, the longest pause since the 1950s.
 
The loonie has recently bounced off a nearly six-month closing low of 99.38 cents, the worst since the currency ended the August 2 trading day at 99.27 cents. As of this writing, the loonie is now down about 3.4% from its 12-month closing high of $1.0326 established September 13.
 
In its January Monetary Policy Report, released the same day it made the rate announcement, the BoC cut its forecast for Canadian gross domestic product growth in 2013 to 2%, from an October 2012 forecast of 2.3%. Although the growth outlook is weaker than forecast in its last quarterly report, the BoC noted that “global tail risks have also diminished.”
 
The BoC also noted that US growth continues “at a gradual pace,” citing restraints imposed by “ongoing public and private deleveraging, global weakness, and uncertainty related to fiscal negotiations.”

The austerity-exacerbated recession in Europe continues, and will be worse than anticipated in October. China, however, is getting better, though activity in other emerging economies has yet to pick up.
 
The BoC pointed out that though commodity prices remain historically high, “temporary disruptions” and “persistent transportation bottlenecks” have constrained prices for Canadian heavy crude oil, a key export. Canada’s slowdown in the second half of 2012 was more dramatic than the BoC anticipated, due to lower levels of business investment and reduced exports.
 
Governor Mark Carney’s message about excessive levels of debt appears to be hitting households, as renewed caution “has begun to restrain” spending.
 
The BoC expects economic growth to pick up through 2013, as business investment and exports rebound on strengthening foreign demand, diminishing uncertainty, and the unwinding of temporary factors that have weighed on resource sector activity.
 
Core inflation and total CPI inflation are both lower than the BoC forecast. The bank expects total CPI inflation to remain around 1% in the near term, rising “gradually, along with core inflation” to the 2% target in the second half of 2014, as the economy returns to full capacity.
 
The BoC will make its next interest rate announcement on March 7.

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