Banks go ‘all in’ with policy stimulus doc

FINANCIAL MARKETS MONTHLY
April 5, 2013
Banks go ‘all in’ with policy stimulus
Central banks around the world are providing a united front by keeping monetary policy extraordi-
narily stimulative and waiting for the returns to show up in faster economic activity. This tactic is
not without risks although it has yet to instigate any worrying inflation pressures. In fact, the aim
of this week’s aggressive policy easing in Japan is to break the persistent run of deflation with the
Bank of Japan (BoJ) aiming to get the inflation rate to 2.0%. The BoJ’s announcement that it will
increase the size and lengthen the maturity of its bond buying program while shifting its opera-
tional target to the monetary base from the overnight rate exceeded investor expectations. The
Reserve Bank of Australia (RBA), the European Central Bank (ECB), and the Bank of England
(BoE) left policy unchanged at their meetings this week with the Bank of Canada (BoC) and US
Federal Reserve likely to follow the same course at their meetings later in the month.
This ‘steady as she goes’ monetary policy stance was echoed in financial markets with 10-year
bond yields, outside of Germany and Japan, holding in recent ranges and the MSCI World stock
index clocking in another 2.1% gain in March.
Data — bumping along
US economic reports in the past month indicated that despite the concern about the effect that
the January 1 US payroll tax increases and March 1 implementation of sequestration, the econ-
omy likely grew at a faster than 3% pace in the first quarter of 2013. In Canada, the January real
GDP report similarly set up for a strengthening in growth following two consecutive quarters of
Inside



Overview
……………………………… page 1

Interest rate outlook
……………………………… page 5

Economic outlook
……………………………… page 6

Currency outlook
……………………………… page 7

Central bank watch
……………………………… page 8

Q1 growth rebound; inflation
low……………….……… page 9











Dawn Desjardins
Assistant Chief Economist
416-974-6919


David Onyett-Jeffries, CFA
Economist
416-974-6525

Central bank near-term bias



Bias three-months out
Against a backdrop of muted inflation and soft growth, there is
little urgency for the BoC to begin withdrawing stimulus, and
it is likely that policy will remain on hold until the second half
of 2014.
Despite downward revisions to FOMC forecasts for growth and
inflation, the unemployment rate forecast moved lower and is
projected to fall below the 6.5% in 2015, which is consistent
with the fed funds target holding steady to the end of 2014.
The April MPC meeting was a non-event as expected, with no
changes coming to policy rates or the size of the asset purchase
program. We expect policy to remain on hold through 2013.
The dovish tone of the ECB’s statement and press conference
accompanying April’s steady policy decision has raised the
risks of further policy easing; however, we continue to expect
that policy rates will remain unchanged.
The RBA made a small upgrade to its assessment of the do-
mestic economy in April but maintained an easing bias. We
continue to expect a 25bp cut to the OCR in June.
The RBNZ stated in March that it expects “to keep the OCR
unchanged through the end of the year.” Accordingly, we
maintain our call for the OCR to remain at 2.50% into 2014.

2



 Financial market volatility
spikes as investors worry
about the global recovery.
 Data reports have erred
on the weak side.
 However there were many
one-off factors that cur-
tailed activity.
 As these factors ease,
growth will accelerate.
 The US recession was
deeper than was previously
reported and GDP output
stands 0.4 pp below its pre-
recession peak.


Highlights
sub-1% increases. European data, on the other hand, point to another quarter of contrac-
tion in early 2013 although the pace of decline is likely smaller than the whopping 0.6%
drop recorded in late 2012 even with the uncertainty created by Cyprus. Having said
that, the low level recorded in the March surveys boosted the risk that the euro area
economy continued to contract early in the second quarter.
US Q1 real GDP forecast revised upward
After stumbling out of 2012, the US economy picked up speed in early 2013. Alongside
another double-digit rise in residential construction activity, consumption reports for

January and February showed gains that were consistent with consumer spending
growth coming in much quicker than the fourth-quarter 2012’s 1.8% pace, assuming
that a small increase in real personal consumption expenditure in March results in con-
sumption growth of 3.2% at an annualized rate.
Shipments of durable goods posted a solid gain in February, and the subcomponent,
non-defence capital goods shipments excluding aircraft, rebounded to more than retrace
January’s decline. This is notable because it enters directly into the quarterly estimate of
business capital spending. The average level for the two months stood 4.4% at an annu-
alized rate above its fourth-quarter 2012 average and is on track to build on the fourth
quarter’s strong gain. Recent data also point to businesses rebuilding inventories in the
first quarter of 2013 following the sharp destocking that took place in the fourth quarter
and trimmed 1.5 percentage points from the quarterly growth rate. Thus, despite higher
payroll taxes, stronger consumer spending, rising residential and non-residential invest-
ment, and inventory rebuilding are likely to result in real GDP growth of 3.2% in the
first quarter, which would be a vast improvement following the negligible 0.4% gain
recorded in the fourth quarter.
but let us not be too excited
The improved tone in the data for January and February flagged a bit in March with the
Institute for Supply Management (ISM) indices posting unexpectedly large declines and
non-farm payroll employment rising at a much more modest clip. Part of this modera-
tion likely reflected concerns about the effect of the ‘across the board’ sequestration cuts
that came into effect at the beginning of March. To some degree, these concerns are
warranted with the coming fiscal contraction likely to weigh on overall GDP growth in
the near term. Having said that, both ISM measures remain above the break-even level
of 50, and as indicated, other monthly data are consistent with a relatively large rebound
in real GDP in the first quarter. We expect that fiscal restraint measures will be most
evident in real GDP growth in the second quarter of 2013 but contend that the strength
in underlying private demand, supported by low interest rates, will result in a reaccelera-
tion in the second half of 2013.
US inflation benign despite monthly pop

The overall US consumer price index (CPI) recorded a sizeable 0.7% increase in Febru-
ary with the annual pace rising to 2.0%, matching the annual increase in the core infla-
tion rate and the Federal Reserve’s longer-term inflation goal. As most of the upward
pressure on the headline rate was due to a jump in gasoline prices that reversed course
in March, the US inflation rate is projected to edge lower in March. Furthermore, infla-
tion is expected to remain close to 2% throughout 2013 as the still considerable unused
capacity in the economy limits the ability of retailers to pass through prices increases.
Fed policy—let it ride!
With no policy meeting until April 30, the latest directive came at the March 20 meeting
when the Fed maintained its policy stance and made small tweaks to the economic pro-
jections. On balance, the strengthening in recent economic reports were offset by con-



Central banks keep push-
ing on the gas and waiting
for growth to pick up.
 Global yields stay in re-
cent ranges and stocks rise.
 The US economy is on
track for a decent pop in
Q1/13 although a hit from
fiscal restraint is likely to
dampen momentum in
Q2/13.
 The Fed will have little
reason to alter its current
policy at its meeting in late
April.

3




 Canada’s economy posts
a solid gain in January.
 Early indicators point to
another decent increase in
February
 setting up for the econ-
omy to break out of the sub-
1% growth range in the sec-
ond half of 2012.
 The Bank of Canada is
likely to tweak its near-term
forecasts at its upcoming
meeting, but no change to
policy is expected
 More interesting will be
the announcement of the
new Governor.
Highlights
cerns about the pace of fiscal contraction thus supporting the characterization of
‘moderate economic growth’ lending support to the decision to maintain the extraordi-
nary amount of monetary policy stimulus. We, too, expect that the pace of growth to
ease in the near term as the fiscal headwinds slow activity and then reaccelerate in the
latter part of 2013 and in 2014; however, the acceleration is unlikely to be sufficient to

push the unemployment rate below the Fed’s 6.5% threshold through the end of next
year. Against this backdrop, we expect the Fed to continue with asset purchases through
the end of this year with the fed funds rate likely to be maintained at its current
‘exceptionally low range’ of 0.00% to 0.25% into 2015.
At long last, Canadian real GDP grew 0.2%
It was worth waiting for the 0.2% rise in real GDP in Canada in January; it was a long
time in coming and, as expected, was the result of a 0.4% rise in output in goods-
producing industries. The increase was boosted by manufacturing activity rising rapidly
with mining output up at a more moderate pace. Service-producing industries managed
to increase output as well and were helped by wholesale trade and a surge in the arts,
entertainment, and recreation component due to the end of the NHL strike.
The increase in January GDP reversed December’s disappointing decline. Indications that
both auto and drilling activity picked up in February point to another decent gain and sup-
port our forecast for first-quarter 2013 growth to strengthen to 1.9% following the fourth
quarter’s modest 0.6% increase. The net improvement in the trade balance in January and
February, on a volumes basis, relative to the fourth quarter, bodes well for trade to add at
about 0.5 percentage points to annualized growth in the first quarter. The labour data was
disappointing with a net 25,700 jobs lost in the first quarter. The 161,000 jobs created in
the second half of 2012 seemed out of step with the economy just managing to grow at a
0.6% annualized pace in that period. As the economy reaccelerates, we expect job creation
to start up again and the unemployment rate to edge lower.
Monthly jump in inflation although annual increase still tame
The all-items Canadian CPI index rose 1.2% in the month of February bringing the an-
nual inflation rate to 1.2% from 0.5% in January. The sharp rise in the month reflected
higher prices for clothing, vehicles, and an 8.4% jump in gasoline prices. Despite the
snapback in prices in the month of February, inflation pressures remain muted with both
the annual headline and core rates, at 1.2% and 1.4% respectively, holding near the
lower end of the Bank’s 1% to 3% target range. The sub-par growth recorded in the
second half of 2012 introduced more slack into the economy and resulted in downward
pressure being exerted on prices relative to a year earlier. The low starting point for the

inflation rates in early 2013 make it likely that readings of sub-2% will persist until the
latter part of 2014. Against this backdrop, there is little urgency for the BoC to embark
on a program of stimulus withdrawal, and it now looks likely that the overnight rate will
remain at 1.0% in 2013 and the first half of 2014; after which, a reacceleration in both
the pace of growth and price pressures, are likely to prompt the BoC into action.
Looking for clues from the Bank of Canada
Markets are not only watching and waiting for the April 17 rate decision and update to
the Bank’s economic forecasts but are also keenly looking to see who will replace Mark
Carney as Governor when he steps down on June 1, 2013. The rate decision is likely to
mimic the details of the March statement with the economic update likely to show small
downward tweaks to the near-term growth and inflation forecasts (for example, first-
quarter 2013 GDP lower than the January forecast of 2.3%). On balance, we do not ex-
pect a significant change in tone or sentiment to be announced. More interesting will be
the announcement of the new Governor. As there is no official timetable, central bank
watchers are going to have to do just that—watch.


4

 The ECB’s dovish tone
in April raises the risks
of added policy easing in
the coming months, but
we continue to expect
the refi rate to be held
steady.
 A weaker near-term
growth outlook in the UK
implies a worsened fiscal
position with debt-to-

GDP now expected to
peak over 100%.
 Despite a modestly
improved tone in domes-
tic data, the elevated
exchange rate keeps the
RBA’s mild easing bias in
place.
 RBNZ Governor
Wheeler expects “to
keep the OCR unchanged
through the end of the
year,” which would be
consistent with our long-
held call for policy to
remain on hold into
2014.
Highlights
Just when you thought it was safe to go back into European waters…
After hints that conditions in the euro area were stabilizing in early 2013, the tide has again
turned in the beleaguered region with the flare up of another crisis (this time in Cyprus) and
weakness in recent economic data. While the contagion from Cyprus’ banking crisis has thus far
been limited thanks to the combination of the improved capital positions of most European banks
and the ECB ensuring ample liquidity in the financial system, the situation has rattled financial
markets and elevated uncertainty. Recent indicators of activity, credit flows, and inflation have
been weak and highlight the aggregated economy’s struggles in finding its footing. The March
purchasing managers’ indexes (PMI) data point to real GDP contracting again in the first quarter
of 2013 with the poor handoff to the second quarter creating some risks to our call for activity to
stabilize. This more downbeat assessment of the outlook was echoed by ECB President Draghi in
the statement following April’s unchanged policy decision when he noted that a recovery is now

unlikely until the second half of 2013 and dropped all references to “signs of stabilization”. The
dovish tone increased the risks of a rate cut or further non-standard policy easing, yet we see little
benefit from further rate cuts for the real economy in the crisis countries and thus expect develop-
ments are more likely to be on the ‘non-standard’ front going forward.
Weak economic outlook weighs on UK government’s books
The non-annualized 0.3% contraction in UK fourth-quarter 2012 real GDP was confirmed and
early data for the first quarter of 2013 suggest that a rebound is not yet in the cards. The index of
production fell to a two-decade low in January while construction data also disappointed. Ser-
vice-sector activity picked up, but PMI data in March pointed to limited improvement in the first
quarter, thereby prompting us to revise our growth forecast down to 0.0% from a non-annualized
0.2% quarterly gain previously. The UK Budget included a weaker near-term outlook with the
revisions, implying a weaker fiscal outturn and a larger borrowing requirement that result in the
government’s debt-to-GDP ratio now peaking above 100%. The Budget also included the annual
review of the BoE’s remit, which endorsed the Monetary Policy Committee’s (MPC) current
approach toward flexible inflation targeting while also calling on the MPC to assess its policies
on communicating its forward guidance in the August Inflation Report. We anticipate that the
MPC will thus maintain the status quo with respect to policy at least until August.
RBA maintains easing bias though rate cut hurdle getting higher
The RBA delivered a steady policy decision in April. The accompanying statement was fairly
balanced. The RBA noted that the “substantial easing of monetary policy” undertaken since
the end of 2011 is having the desired effect of propping up activity in interest rate-sensitive
sectors of the economy. Consumer spending and housing demand have picked up so far this
year, and recent improvements in consumer sentiment bode well for further traction being
gained in the near term. Policymakers, however, continue to express concern over the
‘uncomfortably high’ exchange rate. This remains a key policy consideration that underpins
the RBA’s mild easing bias as well as our call for a further 25 basis point rate cut in June. Ad-
mittedly, the recent domestic data flow suggests the hurdle for further easing is rising, but we
continue to expect that conditions will lead to the prevailing bias being exercised.
RBNZ expects to keep rates on hold “through the end of the year”
New Zealand’s economy expanded by a non-annualized 1.5% in the fourth quarter of 2012.

While drought conditions will likely weigh on near-term agriculture production and exports, the
pick up in construction should result in growth maintaining an upward trajectory in 2013. The
solid handoff from 2012 has led us to revise our forecast for real GDP growth in 2013 to 2.9%
from 2.7% previously, implying a further reduction of spare capacity and thus reduced disinfla-
tionary pressures. The Reserve Bank of New Zealand acknowledged the indications of rising
output and inflation in its March Monetary Policy Statement but bluntly stated that it “expects to
keep the OCR unchanged through the end of the year.” Accordingly, we maintain our long-held
call for the OCR to remain at 2.50% through 2013, with a gradual tightening of policy in 2014.



5


Interest rate outlook
%, end of period
Central bank policy rate
%, end of period
Source: Bloomberg, Reuters, RBC Economics Research
* Two-year/10-year spread in basis points **New Zealand’s yield curve: 10-year vs. three-year

Source: Reuters, RBC Economics Research
Current Last
Eurozone Refi rate 0.75 1.00 Jul. 05, 2012
Australia Cash rate 3.00 3.25 Dec. 5, 2012
New Zealand Cash rate
2.50 3.00 Mar. 10, 2011
Current Last
United States Fed funds 0.0-0.25 1.00 Dec. 16, 2008
Canada Overnight rate 1.00 0.75 Sep. 8, 2010

United Kingdom Bank rate 0.50 1.00 Mar. 5, 2009
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4
Canada
Overnight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50
Three-month 0.92 0.88 0.90 1.05 0.98 1.00 1.00 1.00 1.05 1.10 1.25 1.55
Two-year 1.20 1.03 1.15 1.05 1.00 0.90 1.05 1.10 1.15 1.25 1.45 1.70
Five-year 1.56 1.25 1.35 1.30 1.30 1.20 1.40 1.50 1.55 1.70 1.90 2.15
10-year 2.11 1.74 1.75 1.75 1.88 1.85 1.95 2.10 2.15 2.30 2.50 2.80
30-year 2.64 2.33 2.40 2.40 2.50 2.55 2.65 2.70 2.70 2.75 2.90 3.15
United States
Fed funds 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13
Three-month 0.07 0.09 0.10 0.05 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Two-year 0.34 0.25 0.25 0.25 0.25 0.25 0.35 0.45 0.65 0.85 1.00 1.25
Five-year 1.04 0.70 0.72 0.70 0.77 0.90 1.05 1.20 1.40 1.50 1.75 2.00
10-year 2.20 1.60 1.65 1.70 1.87 2.10 2.25 2.40 2.55 2.65 2.95 3.25
30-year 3.32 2.70 2.80 2.90 3.10 3.45 3.60 3.85 3.95 4.00 4.20 4.50
United Kingdom
Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Two-year 0.43 0.40 0.20 0.20 0.21 0.20 0.30 0.40 0.50 0.30 0.40 0.40
10-year 2.00 1.80 1.70 1.70 1.78 1.80 2.00 2.25 2.50 2.25 2.35 2.50
Eurozone
Refi rate 1.00 1.00 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75
Two-year 0.09 0.10 0.00 0.00 -0.02 0.10 0.15 0.20 0.30 0.30 0.40 0.40
10-year 1.61 1.50 1.50 1.50 1.29 1.50 1.60 1.75 2.00 2.10 2.20 2.25
Australia
Cash target rate 4.25 3.50 3.50 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 3.00
Two-year 3.49 2.46 2.49 2.75 2.83 2.80 2.90 3.10 3.25 3.30 3.40 3.50
10-year 4.10 3.04 2.94 3.00 3.42 3.60 3.65 3.70 3.85 3.95 4.35 4.75
New Zealand
Cash target rate 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.00 3.25

Three-year 3.11 2.37 2.55 2.60 2.60 2.70 2.80 2.90 3.00 3.20 3.40 3.50
10-year 4.17 3.40 3.57 3.80 3.52 4.10 4.25 4.50 4.70 4.80 5.10 5.50
Yield curve
Canada 91 71 60 70 88 95 90 100 100 105 105 110
United States 186 135 140 145 162 185 190 195 190 180 195 200
United Kingdom 157 140 150 150 157 160 170 185 200 195 195 210
Eurozone 152 140 150 150 131 140 145 155 170 180 180 185
Australia 61 58 45 25 59807560606595125
New Zealand 106 103 102 120 92 140 145 160 170 160 170 200
ForecastActuals


6

Economic outlook
Inflation tracking
Source: Statistics Canada, Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New
Zealand, RBC Economics Research
Source: Statistics Canada, US Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New
Zealand, RBC Economics Research
1 Seasonally adjusted measurement.
2 Personal consumption expenditures less food and energy price indices.
*Seasonally adjusted annualized rates

Inflation Watch
Current period Three-month trend Six-month trend
Canada Bank of Canada core CPI
1
Feb. 0.5 1.3 1.2 0.9
United States Core PCE

2
Feb. 0.1 1.3 1.1 1.1
United Kingdom All-items CPI Feb. 0.6 2.8 2.7 3.0
Eurozone All-items CPI Feb. 0.2 1.8 -0.9 1.3
Australia Trimmed mean Q4 0.6 2.3 N/A N/A
New Zealand CPI Q4 -0.2 0.9 N/A N/A
Measure
Period ago Year ago
Growth outlook
% change, quarter-over-quarter in real GDP
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q
4
14Q1 14Q2 14Q3 14Q4 2011A 2012A 2013
F
2014F
Canada* 1.2 1.9 0.7 0.6 1.9 2.4 2.9 3.0 3.2 2.9 2.8 2.7 2.6 1.8 1.8 2.9
United States* 2.0 1.3 3.1 0.4 3.2 1.9 2.8 3.0 3.0 3.0 3.1 3.3 1.8 2.2 2.2 2.9
United Kingdom -0.1 -0.4 0.9 -0.3 0.0 0.3 0.5 0.5 0.5 0.5 0.5 0.5 1.0 0.3 0.8 2.0
Eurozone -0.1 -0.2 -0.1 -0.6 -0.1 0.2 0.3 0.3 0.3 0.3 0.3 0.3 1.5 -0.5 -0.3 1.0
Australia 1.2 0.6 0.6 0.6 0.6 0.6 0.8 0.7 0.9 0.8 0.8 0.8 2.4 3.6 2.5 3.2
New Zealand 1.0 0.2 0.2 1.5 0.5 0.8 0.7 0.7 0.7 0.6 0.6 0.5 1.4 2.5 2.9 2.7
Inflation outlook
% change, year-over-year
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q
4
14Q1 14Q2 14Q3 14Q4 2011A 2012A 2013
F
2014F
Canada 2.4 1.6 1.2 0.9 0.9 1.4 1.7 1.8 1.8 1.8 1.9 1.9 2.9 1.5 1.5 1.9
United States 2.8 1.9 1.7 1.9 1.7 1.8 1.7 1.8 1.9 1.9 1.8 1.9 3.2 2.1 1.8 1.9

United Kingdom 3.5 2.8 2.4 2.7 2.7 2.9 3.0 2.6 2.4 2.3 2.3 2.2 4.5 2.8 2.8 2.3
Eurozone 2.7 2.5 2.5 2.3 1.8 1.6 1.5 1.4 1.5 1.5 1.3 1.3 2.7 2.5 1.6 1.4
Australia 1.6 1.2 2.0 2.2 2.9 3.1 2.4 2.9 2.8 2.8 2.9 3.0 3.3 1.8 2.8 2.9
New Zealand 1.6 1.0 0.8 0.9 0.8 0.9 1.0 1.7 1.7 1.7 1.8 1.7 4.0 1.1 1.1 1.7


7

Currency outlook
RBC Economics outlook compared to the market
Source: Bloomberg, RBC Economics Research
Level, end of period
Rates are expressed in currency units per US dollar and currency units per Canadian dollar, except the euro, UK pound, Australian dollar, and New
Zealand dollar, which are expressed in US dollars per currency unit and Canadian dollars per currency unit.

The following charts track historical exchange rates plus the forward rate (dashed line) compared to the RBC Economics forecast
(dotted line) out one year. The cone for the forecast period frames the forward rate with confidence bounds using implied option
volatilities as of the date of publication.

Canadian dollar
0.80
0.90
1.00
1.10
1.20
Apr-12 Oct-12 Apr-13 Oct-13
Euro
1.00
1.10
1.20

1.30
1.40
1.50
1.60
1.70
Apr-12 Oct-12 Apr-13 Oct-13
Japanese yen
66
76
86
96
106
Apr-12 Oct-12 Apr-13 Oct-13
U.K. pound
1.20
1.40
1.60
1.80
2.00
Apr-12 Oct-12 Apr-13 Oct-13
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4
Canadian dollar 1.00 1.02 0.98 0.99 1.02 1.04 1.05 1.04 1.03 1.02 1.02 1.02
Euro 1.33 1.27 1.29 1.32 1.28 1.26 1.24 1.22 1.21 1.20 1.21 1.22
U.K. poun
d
ster
l
ing1.601.571.621.621.521.521.551.541.571.581.611.63
New Zea
l

an
d

d
o
ll
ar 0.82 0.80 0.83 0.83 0.84 0.84 0.85 0.86 0.85 0.83 0.82 0.80
Japanese yen 82.9 79.8 77.9 86.8 94.2 90.0 85.0 82.0 80.0 81.0 82.0 85.0
C
h
inese renmin
b
i 6.296.366.296.236.216.206.156.156.126.106.086.06
Austra
l
ian
d
o
ll
ar 1.03 1.02 1.04 1.04 1.04 1.07 1.10 1.12 1.10 1.08 1.06 1.04
Mexican peso 12.8 13.4 12.9 12.9 12.3 12.5 12.3 12.2 12.0 11.9 11.8 11.8
Canadian dollar cross-rates
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2
13Q3 13Q4 14Q1 14Q2 14Q3 14Q4
EUR/CAD 1.331.291.261.311.301.311.301.271.251.221.231.24
GBP/CAD 1.601.601.591.611.551.581.631.611.621.611.651.66
NZD/CAD 0.820.810.820.820.850.870.890.890.880.850.840.82
CAD/JPY 83.0 78.5 79.2 87.4 92.6 86.5 81.0 78.8 77.7 79.4 80.4 83.3
AUD/CAD 1.031.041.021.031.061.111.161.161.131.101.081.06
Forecast

Actuals


8

Central bank watch
Bank of Canada
Federal Reserve
European Central Bank
Bank of England
Australia and New Zealand
• Canadian Q1/13 growth is expected to re-
bound to 1.9% from a 0.6% gain in Q4/12.
• Modest growth combined with inflation re-
maining in the bottom half of the BoC’s target
range argues for monetary conditions to remain
accommodative. We expect the overnight rate to
hold at 1.00% until mid-2014.
• The third estimate of US Q4/12 GDP growth
was revised upward again to show a 0.4% annual-
ized increase (previously reported as a 0.1% gain).
• The FOMC revised downward its forecasts for
growth and inflation, and we look for the target
funds rate to rise in 2015, which is consistent with
the outlook for the unemployment rate to fall below
the 6.5% threshold in 2015.
• The non-annualized 0.3% contraction in UK
real GDP in Q4/12 was confirmed, and weak data
thus far for the beginning of 2013 suggest that a
rebound is not in the cards in Q1.

• The April MPC meeting was uneventful with
no changes to either rates or asset purchases. We
expect the BoE to maintain the policy rate at
0.5%.
• The RBA delivered another steady-rate ver-
dict in April and maintained an easing bias,
thereby supporting our expectation for one final
25bp cut to the OCR in June.
• New Zealand real GDP was solid in Q4/12
and indicated that construction activity has begun
to gain traction. The RBNZ remains on track to
remove monetary stimulus starting in Q1/14.
• The March PMI showed a deterioration in
manufacturing, construction, and services, therein
providing downside risk to our forecast for a
modest 0.1% contraction in Q1/13 real GDP
• Recent weak data and a further moderation in
inflation led the ECB to adopt a more downbeat
tone in April and to support accommodative pol-
icy remaining in place for the foreseeable future.
-10
-8
-6
-4
-2
2
4
6
8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Quarter-over-quarter annualized % change
Canadian real GDP growth
Forecasted values:
Source: Statis tics Canada, RBC Economics Research
-10
-8
-6
-4
-2
2
4
6
8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Quarter-over-quarter annualized % change
U.S. real GDP growth
Source: Bureau of Economics Analysis, RBC Economics Research
Forecasted values:
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% change, quarter-over-quarter

Eurozone GDP
Source: Eurostat, RBC Economics Research
Forecasted values:
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% change, quarter-over-quarter
U.K. real GDP growth
Source: Central Statistical Office, RBC Economics Res earch
0
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bank of England, RBC Economics Res earch
%
Forecast
U.K. policy rate
-1.5

-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Australia New Zealand
% change, quarter-ov er-quarter
Australia and New Zealand GDP growth
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
Forecast
0
1
2
3
4
5
6
7
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Australia New Zealand
% change, year-over-year
Australia and New Zealand inflation
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
Forecast
0
1

2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: ECB, RBC Economics Research
%
Forecast
ECB refi rate
0
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
%
Forecast
Canadian overnight rate
0
1
2
3
4
5

6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
%
Forecast
U.S. target rate


9

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®Registered trademark of Royal Bank of Canada.
©Royal Bank of Canada.
Q1 growth rebound; inflation still low
Inflation rates in Canada and the US remain at or below the 2%
target thereby providing no incentive for central banks to start
to withdraw stimulus.
Canada’s economy’s anemic growth in H2/12 looks to have
ended in early 2013.
Even with tax hikes put in place on January 1, 2013, Q1 con-
sumer spending picked up its pace…
…consistent with a jump in Q1 real GDP although sequestration
will likely damped the growth rate in Q2.
-3
-2
-1

0
1
2
3
4
5
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Canada U.S.
Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Research
Inflation: Canada and the U.S.
% change, year-over-year
-10
-8
-6
-4
-2
2
4
6
8
2009 2010 2011 2012 2013 2014
Quarter-over-quarter, % change, annualized rate
Canada's Real GDP

Forecast
Source: Statistics Canada, RBC Economics Research
-3
-2
-1
1

2
3
4
5
2009 2010 2011 2012 2013
Quarter-over-quarter, % change, annualized rate
U.S. Real PCE
Source: Bureau of Economics Analysis, RBC Economics Research
-6
-4
-2
2
4
6
2009 2010 2011 2012 2013 2014
Quarter-over-quarter, % change, annualized rate
U.S. Real GDP
Source: Bureau of Economics Analysis, RBC Economics Research
Forecast