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2007 U.S. Economic Events & Analysis

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Bank of Canada Announcement

Definition
The Bank of Canada Governing Council meets and makes an announcement about every six weeks to indicate the near-term direction of monetary policy. The announcement conveys to the financial markets and investors if and what change in policy might be.

Why Investors Care?
The Bank of Canada Governing Council determines interest rate policy for Canada. The Council is composed of the Governor, Senior Deputy Governor, and four Deputy Governors. The Council meets about every six weeks on a predetermined schedule. The announcement of any change in monetary policy follows, usually on a Tuesday morning. Decisions are derived by means of a consensus, the same as they are for the European Central Bank. Unlike the Federal Reserve, Bank of Japan, the Bank of England or the European Central Bank, the Bank of Canada has an established inflation target range of between one and three percent but is focused on the mid-point of two percent. Because interest rate decisions affect market interest rates to varying degrees, the Bank has created its own core consumer price index, which eliminates eight volatile products.

As in the United States, market participants speculate about the possibility of an interest rate changes. If the outcome is different from expectations, the impact on Canadian markets can be dramatic and far-reaching. The interest rate set by the Bank of Canada, serves as a benchmark for all other rates. A change in the rate translates directly through to all other interest rates. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.