British Columbia Market Update – January 2010

The Bank of Canada left the overnight rate at 0.25%.  Once again, the central bank gave a conditional commitment to keep the policy rate at its current level “until the end of the second quarter of 2010″ in order to ensure that inflation stays on course to meet the medium-term target.

The Bank maintained its forecast that stronger growth will likely be reported for the final quarter of 2009, after a disappointing third-quarter performance, with the economy forecasted to build momentum throughout 2010. Most experts maintain that 2010 will see stronger growth including an improved employment outlook, increase in investment in machinery and equipment, and large gains in the leading indicators index.

However, the strengthening in the Canadian dollar and weak  U.S. demand may cause a slight risk to Canada’s recovery. Last week’s reiteration that overall risks are “tilted slightly to the downside” as a result of policy operating at the lower bound indicates that the bank’s policy plan remains intact and it is unlikely that there will be a change in the overnight rate before the end of the second quarter of this year. However, this cannot be written in stone.  Huge employment gains and strong 2009 fourth quarter numbers could change the timing of the rate increase.

Many forecasters are still expecting Canada’s economy to gain strength; perhaps though, more slowly than earlier recoveries.  This may in turn likely delay raising the overnight rate until the summer of 2010.