• This week, financial markets focused their attention on the plan put together by European leaders to address Europe’s fiscal crisis, as well as on the Bank of Canada’s interest rate decision and subsequent Monetary Policy Report.


• The Bank of Canada announced that it would leave interest rates unchanged. This was widely expected by financial markets.


• The central bank also released its Monetary Policy Report, in which it downgraded its near-term growth outlook for Canada, bringing it more in line with forecasts by TD Economics and other private sector analysts.








 James Marple, Senior Economist, 416-982-2557




This week was a busy one for Bank of Canada Governor Mark Carney. In addition to fending off rumours that he is at the top of the list of candidates to head the Basel-based Financial Stability Board and dealing with what focus groups think they saw in the artwork for the new $100 bill, he had to focus on the Bank’s real work – that is, setting monetary policy and assessing the condition of the Canadian economy.

The monetary policy bit went in the direction that markets expected: the Bank maintained its benchmark overnight rate at 1.00%, where it has been since September 2010.



Last month’s uptick in consumer inflation was considered minor and temporary enough to warrant no action on rates from the Bank.

As to the economic assessment portion, which feeds into the rate-setting decision, it was described in detail the following day in the Bank’s Monetary Policy Report, which outlines the economic assumptions underpinning the rate-setting decision. The Report was heavy on analysis of the situation in Europe and in the United States. The Bank sees that the downside risks it had identified in its July report are now materializing, especially the escalation of the euro debt crisis. The Bank now expects the euro zone to go into a brief recession and that weak growth will prevail in the U.S. until the middle of 2012.

As a result, the Bank downgraded its Canadian economic growth forecasts for 2011 and 2012 and boosted its outlook for 2013. This brings its growth scenario more in line with that of the private sector, and very near the one TD Economics released in mid-September. There is also a consensus between bankers (central and others) that Canada’s modest growth in the near term will essentially be domestically driven.


There was a striking contrast between the calm, composed poise of Canadian monetary officials and the pressure cooker atmosphere in Brussels, where European leaders were frantically putting together a plan to tackle the European financial crisis. The highlights of the plan were a debt swap that will reduce the value of outstanding Greek debt by 50% and a better-defined role for the European Financial Stability Fund (EFSF) as a bond guarantor.

Despite the fact that much heavy lifting remains to be done in Europe, the plan was received positively by global financial markets, along with stronger than expected U.S. GDP data. This generated enough appetite for risk, which tends to benefit smaller and relatively healthy markets like Canada. Canadian markets were well ahead of the week’s opening at the time of this writing, with the TSX gaining about 500 points, having now recouped more than half of the mid-August drop. The Canadian dollar climbed back to parity in line with this move up the risk curve, and the VIX index, an indicator of expected market volatility, fell to its lowest level since the beginning of August.

However, as discussed in yesterday’s TD Economics Observation on the European sovereign debt plan, many details still have to be worked out. While short-term solutions are critical to ensure that the crisis at hand remains contained, those solutions have to be compatible with a longer-term plan to properly fix Europe’s finances. Suffice to say, market volatility is a theme we still expect to prevail going forward. 


Jacques Marcil, Senior Economist, 416-944-5730


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