Canadian Key Rate Untouched

Daily Analysis - 21/01/2016

Bank of Canada Keeps Rates Steady as Inflation Outlook Evolves

The Bank of Canada announced interest rates will be left unchanged despite recent economic data showing accelerated weakness during the final quarter of 2015. Inflation closing in on the Central Bank’s target, a weak Canadian dollar, and government investment are the key drivers to watch unfold for the coming fiscal year.

UK Unemployment Dips

Unemployment in the United Kingdom continues to decline according to the latest data reported by the Office for National Statistics. For the month of November, unemployment dropped to 5.10% from October’s 5.20%, marking the fifth consecutive decline in the rate and the lowest jobless level since 2005. Wages, including bonuses, continued to experience decelerating growth, exhibiting slowing expansion over the same period at 2.00%, missing estimates of 2.10% and previous month’s 2.40% reading. Wages excluding bonuses rose to 1.90%, beating expectations of 1.80% but below the prior figure of 2.00%. Bank of England Governor Mark Carney stated that in order for the Central Bank to raise rates, policymakers need to see a pickup in wage growth above 3.00% a year. The Governor elaborated on the point, saying that recent figures indicate remaining slack in the labor sector. Following the announcement, EURGBP fell sharply, dropping to 0.7700.

US Inflation Picture Mixed

The latest reading of US consumer prices showed headline inflation slip by -0.10% month over month, printing below both the prior month’s flat figure and expectations of 0.00%. However, despite the monthly decline, annualized CPI inflation rose to 0.70% in December, denoting the highest pace for 2015 with the Bureau of Labor Statistics reporting the gains outpacing the prior month’s 0.50% increase. While the figure missed estimates of 0.80%, the continued drop in energy prices is still weighing on the measure. Annual core inflation picked up slightly to 2.10%, showing the largest gain since mid-2012 whereas monthly core inflation rose by 0.10% after ticking 0.20% higher in the prior reading. The strength of the dollar combined with rapidly building crude stocks are keeping pressure on prices for some core goods. The dim inflation data amid prices in oil falling will see the Federal Reserve continue to worry about inflation reaching the 2.00% target.

Canada Rates Left Unchanged

The Bank of Canada opted to keep rates unchanged at 0.50%, meeting consensus expectations. Central Bank officials reported their decision as concerns climb about the country’s economy considering still tumbling commodity prices. While some market participants were anticipating a rate cut, the Central Bank was unmoved in its stance owing to inflation heading towards the ideal target of 2.00%. However, despite inflation trending towards the goal, the BoC has lowered its growth forecast for 2016 and 2017 to 1.50% and 2.50% respectively. Central Bank Governor Stephen Poloz reiterated the importance of oil prices dropping and the persistent weight on the country’s economy. As the Canadian dollar weakens pressuring inflation higher, other resources will blossom according to Poloz. The idea of cutting rates was on the table as the economy appeared to stall at the final quarter of 2015, but the Government’s stimulus package and rising inflation, reduced the necessity to act.

South African Inflation Accelerates

Annualized inflation in South Africa surged in the latest reading, showing the biggest increase in a year after climbing to 5.20% for December, matching expectations after rising well above the previous month’s 4.80% figure. On a monthly basis, consumer prices rose 0.30% in December, exceeding forecasts and the November value of 0.20% and 0.10% respectively. The rise was reportedly due to higher costs for food, transportation and household services. Values are still within the South African Reserve Bank’s targeted range of 3.00%-6.00%. SARB policymakers increased the repo rate from 6.00% to 6.25% during their last monetary policy committee meeting, citing inflationary pressures as the justification for hiking rates. In total, the SARB has increased rates by 125 basis points over the last few years, with rising expectations of additional imminent action at the Central Bank’s next meeting on January 28^th.