Macroeconomic Analysis of Bank of Canada's 2019 Interest Rate Policy

This essay provides a macroeconomic analysis of the Bank of Canada's decision to hold the overnight interest rate unchanged at 1.75% in January 2019. It examines the factors influencing this decision, including lower oil prices, softer domestic data, and inflation concerns. The analysis considers the impact of global economic conditions, such as the US-China trade conflict and fluctuations in commodity prices, on the Canadian economy. It also discusses the role of employment rates, housing investment, and GDP growth in shaping the Bank's monetary policy. The essay concludes that the interest rate decision reflects the oil price shock, the economy's current capacity, and the business investment environment, while also highlighting the Bank's intention to eventually return to a neutral interest rate close to 3.5% based on future economic developments.

RUNNING HEAD: MACROECONOMICS
MACROECONOMICS

MACROECONOMICS
Introduction
The first policy interest rate announcement of the Bank of Canada on 9th Wednesday
2019, left a target for the overnight interest rate to be unchanged at 1.75% (Canada, 2019). An
unchanged or changed target in the overnight interest rate by the Bank of Canada, which is
Canada's central bank has a widespread impact on every sector within the Canadian economy,
which includes Government, Households, Businesses, Financial Markets and more (Woodford,
2011). The current scope of discussion deals with agreeing with the decision made the Bank of
Canada.
Analysis
The Bank of Canada had raised interest rates three times in 2018, however, at the
beginning of 2019, the bank suddenly held the interest rates to be steady. The central bank in
Canada bases its decision regarding changing interest rates on basis of several factors, in this
case, lower oil prices, softer domestic data and inflation, and credit remained to be the focus of
policy interests.
With the global economic expansion continuing to be moderate and growth forecast
slowing down to 3.4% in 2019 from 3.7% in 2018. The several macroeconomic factors such as
US-China trade conflict weighing on global demand and commodity prices, a global benchmark
in oil prices which is 25% lower as against assumptions with increased worries in global demand
is bound to get reflected in the equity and bond market (Arrow and Kruz, 2013). The policy
interest is dependent upon developments in the oil market, global trade policy and the Canadian
housing market.
Primarily the drop in global oil prices has a profound impact on the Canadian economy
reflected through lower terms of trade and national income. Increasing production and
transportation constraints have led to pushing up of oil inventories and exerting pressure on
Canada's benchmark prices. Employment is Canada's economy has been strong with
unemployment at a 40-year low (Taylor, 2009). The unchanged policy rates are done due to
consumption and housing investment remaining weak, with changes in mortgage guidelines and
higher rates of interests. The Bank will need to monitor any changes in the housing sector and
other sectors to reflect the same in policy interest rates.
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The Bank has projected the GDP of the country to be growing at 1.7% in 2019, which
depicts a slowing pattern as compared to earlier quarter outlooks. The CPI inflation is expected
to be at 2%, which is lower primarily due to lower gasoline prices (Woodford, 2012). The
Canadian dollar is expected to exert an upward pressure on inflation, which led the Government
Council to determine that the policy interest rate will have to rise to achieve inflation targets.
Conclusion
The central bank expressed its interests in getting back to its neutral interest rates close to
3.5% but it would not take place any day soon. The bank will need to base its decisions on oil
prices and monitoring data of household consumption patterns and global trade policy
developments. The current interest rate is a mere reflection of the oil price shock, the economy's
current capacity, and the business investment environment.
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References
Arrow, K. J., & Kruz, M. (2013). Public investment, the rate of return, and optimal fiscal policy.
RFF Press. Accessed from https://content.taylorfrancis.com/books/download?
dac=C2011-0-05619-7&isbn=9781135988821&format=googlePreviewPdf
Canada, B. (Jan 9, 2019).Bank of Canada maintains overnight rate target at 1 ¾ per cent.
Retrieved from <https://www.bankofcanada.ca/2019/01/fad-press-release-2019-01-09/>
Taylor, J. B. (2009). The financial crisis and the policy responses: An empirical analysis of what
went wrong (No. w14631). National Bureau of Economic Research. Accessed from
http://www.nber.org/papers/w14631.pdf
Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. princeton
university press. Accessed from https://books.google.co.in/books?
hl=en&lr=&id=8AlrisNOOpYC&oi=fnd&pg=PP2&dq=policy+interest+rate+&ots=RkV
b6VIRa4&sig=BPBmZqAyeI6dZbwdtRBpUv_nAbk#v=onepage&q=policy%20interest
%20rate&f=false
Woodford, M. (2012). Methods of policy accommodation at the interest-rate lower bound. The
Changing Policy Landscape, 185, 288. Accessed from
http://graduateinstitute.ch/files/live/users/providers/ldap/ci/dh/dg/tille/files/
Class_E_527b_Doc_Sem_spring_2014/class_9_april_17/Woodford.pdf
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