The Bank of Canada and US Federal Reserve took a more subdued monetary policy stance in 2003.
The Federal Reserve adjusted its Federal Funds rate only once, a cut of
25 basis points in June to 1.0%, the lowest the rate has been in 45 years. The Bank of Canada raised its target overnight rate twice by 25 basis points early in the year, only to reverse it in July and September as inflation fell rapidly, due in part to declining crude oil prices and automobile insurance rates.
The Canadian dollar appreciated widely against the US and other major currencies in 2003. Over the 12-month period, the dollar gained 21% against the US dollar, due mainly to weakness in the US currency. Only the euro regained its value against the Canadian dollar by the end of the year.
This strength has cost exporters as their goods became more expensive to foreign buyers, particularly US customers in the throes of an economic recovery. Gains in the US dollar-denominated commodities were wiped out by the appreciation of the Canadian dollar. Domestic consumers benefited with increased purchasing power, as did firms purchasing foreign-made machinery and equipment.
The Bank of Canada was optimistic that the economy would regain some momentum late in the year, and then tempered its confidence when the economy failed to show marked improvement.
The bank foresees both the CPI and core inflation remaining low well into 2005, returning to its 2% target level by the end of that year. It projects that the economy will likely return to almost full capacity by the third quarter of 2005.
With the continued pressure from the appreciation of the Canadian dollar and persistently low inflation, decreases to the bank’s target interest rate may be the order of the day for 2004.
