13 April 2011
• Today’s report brings the Bank of Canada almost exactly in-line with our own expectations for annual
Canadian economic growth in both 2011 and 2012. Moreover, the economic assessment suggests that it is
only a matter of time before the Bank resumes raising interest rates. Given the prospects for the output gap to
be eliminated in mid-2012, the Bank will want monetary policy at close to a neutral setting at that time –
although strength in the Canadian dollar will temper the level to which rates rise.
• We anticipate the Bank to raise the Overnight Rate to 2.00% by the end of this year, and gradually continue
tightening in 2012. This would represent a gradual rebalancing of policy, which will temper consumer
spending and constrain real estate, but will leave economic growth advancing at a healthy clip of around 2.5%.
• There were no surprises in today’s Monetary Policy Report (MPR)
• As cited in the communiqué accompanying the rate decision yesterday, the Bank of Canada upgraded its
outlook for Canadian economic growth. The Bank now expects real GDP growth in 2011 to be 2.9% relative to
its 2.4% expectation in January. However, 2012 was downgraded marginally by 0.2 percentage points from
2.8% to 2.6%.
• Very little was changed regarding the domestic outlook. There were two key factors behind the overall upgrade
to 2011. First, consumer spending showed stronger resilience than they had originally anticipated (annualized
growth in the fourth quarter was very robust at 4.9%). Second, higher commodity prices are driving up
Canada’s terms-of-trade and leading to much stronger personal wealth gains that would support a slightly
higher profile for consumer spending.
• Accordingly, the Bank is tracking economic growth of 4.2% annualized in Q1, slightly above the most recent
TD Economics forecast for 3.8%. However, the Bank and TD Economics both agree that this will be the
strongest quarterly performance, and the pace of growth will slow to below 3% over the remaining quarters of
• On the global front, the laundry list of risks to the outlook has lengthened considerably in recent months. In
addition to sovereign debt and banking problems in Europe and broad inflationary pressures in emerging
markets, we now add potential supply chain disruptions due to the Tohoku earthquake and elevated
geopolitical tensions in the Middle East and Northern Africa. However, the Bank ultimately judges the global
economic recovery to be more firmly entrenched and expects global growth to continue at a steady pace.
• The Bank also raised its profile for Canadian inflation. The Bank conceded that higher food and energy prices
will likely push total CPI inflation higher by the second quarter to 2.7%, which is already partially mitigated by a
higher Canadian dollar. However, this is likely to be only temporary, as the Bank expects total CPI inflation to
return to 2.0% by the second quarter of 2012. Underlying inflationary pressures are slightly higher than their
January projection, but still remain well contained and are in-line with the Bank’s comfort level. Core inflation is
now expected to reach 2.0% by the middle of 2012, up from the end of 2012.
• The output gap closes two quarters earlier than the Bank projected in January, now by the middle of 2012.
Francis Fong, Economist Toronto Dominion Economics