Here comes the Bank of Canada ...

The Bank of Canada is set to announce it latest interest rate decision at the top of the hour.

Analysts are roughly split on whether the central bank will hold interest rates at 0.5% or cut them ot 0.25%, which would be a financial crisis low.

Writing for Bloomberg on Tuesday, Luke Kawa summarized the conundrum facing BoC governor Stephen Poloz as follows:

Nonetheless, it is the output gap that the Bank of Canada chooses to hang its hat on […]

In that sense, the Bank of Canada’s January 2015 interest cut was proactive, foreseeing a widening of the output gap absent the addition of monetary stimulus following the collapse in oil prices. The July reduction was of a more reactive nature, responding to a drop in activity that turned out to be larger, and ultimately long-lived, than anticipated.

This month, a blend of both dynamics is at play: sluggish fourth-quarter data suggest that there is more economic slack than the Bank of Canada envisioned in October, while declining inflation expectations and subdued hiring plans imply more weakness on the horizon.

Proponents of a rate cut often cite those two factors, among others, as support for action by the Bank of Canada, while opponents of additional easing see two ways a rate cut could destabilize the financial system.

And so while the BoC has sort of the inverse of what the Federal Reserve is grappling with — the Fed seems to be looking at a “hold or raise” decision at its meetings this year — central banking really comes down to inflation expectations and where a country is in its business cycle.

The decline in the price of oil has certainly weighed on Canada’s economy this year and the Canadian dollar, also known as the loonie, is at its lowest level since about 2003.

Ahead of the rate announcement the US dollar was up about 0.4% against the loonie to another high or around 1.46.

We’ll be back with the full release and market reaction when the statement crosses.

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