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Canada: Lowering Expectations• The BoC shifted its expectations for policytightening out significantly as it revised down itsgrowth forecasts. The BoC also left the dooropen to cut rates in the first quarter of 2012 if theUS were to fall into recession as we expect.• The BoC’s downward revision to theCanadian growth outlook also prompted cuts tothe inflation outlook. The BoC now judges therisks to their forecasts to be roughly balanced.• The BoC zeroed in on financial market risks,which we think are likely to be formallyincorporated into their mandate in the comingdays.• We see two likely scenarios for policy: i/growth evolves in line with the BoC’sexpectations, and thus, the Bank remains onhold until at least mid-2013; or ii/ growthdisappoints, and the BoC cuts rates early nextyear and remains on hold until at least mid-2013.We think the latter is more likely.A significant shiftThe Bank of Canada (BoC) kept its overnight rateunchanged in its 25 October policy statement whilelowering expectations for domestic economic growthciting several downside risks to the global economythat have been realised since the last meeting. TheBank of Canada shifted its expectations for policytightening out significantly as it revised down itsglobal and domestic growth expectations.The BoC also left the door open to cut its policy ratein the first quarter of 2012 if the US were to fall intorecession, as we expect. The quarterly MonetaryPolicy Report (MPR) highlighted the significantrevisions to the growth outlook with Q4 growthrevised from 2.9% q/q ar to 0.8% q/q ar—in line withour expectations for the quarter. The revision cameon the back of weaker expectations for both personalconsumption and net exports. This is consistent withthe Conference Board’s consumer confidence indexfor October, which fell to its lowest level since March2009 (see Chart 2).Downside risksThe BoC anticipates a brief recession in the euroarea. Although they expect the euro crisis to becontained, the danger of failing to contain the crisis is“the most serious risk facing the global and Canadian3210-1-2-3-4Chart 1: A Slow Closing of the Output Gap (%)Q1 1995 Q1 1998 Q1 2001 Q1 2004 Q1 2007 Q1 2010Source: Reuters EcoWin Pro1101051009590858075706560Chart 2: Consumer confidence is weakJun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11Source: Conference Boardeconomies”. Meanwhile, they forecast weak growthin the US through the first half of 2012 before theAmerican economy gradually gains strengththereafter. However, in the MPR, the BoC noted that“a US recession would have material consequencesfor growth and inflation in Canada”. In addition, highlevels of household debt “could lead to a sharperthan-expecteddeceleration in household spending.Relatedly, if there were a sudden weakening in theCanadian housing sector, it could have sizeablespillover effects on other areas of the economy”.Upside risksThe upside risks relate to possible unexpectedinflationary pressures on the back of either morepersistent growth in emerging market economies,stronger-than-expected momentum in householdborrowing, and/or more decisive global policy actionwhich “could lift confidence more rapidly thancurrently projected”.Bricklin Dwyer 27 October 2011Market Mover12www.GlobalMarkets.bnpparibas.com