Bank of Canada signals rates to remain on hold even longer Published April 18, 2013 UncategorizedLeave a Comment
The Bank of Canada kept its key policy rate at 1 per cent on April 17th 2013. It has been unchanged at this level for more than two and a half years.
In its April policy rate announcement, the Bank lowered its forecast for Canadian economic growth to 1.5 per cent this year. Its previous forecast published in January predicted growth of 2 per cent in 2013.
The Bank’s new forecast is in line with the recently downgraded outlook issued by the International Monetary Fund and is slightly more pessimistic than the consensus forecast by private sector economic forecasts.
The Bank still expects growth to pick up later this year, but pushed the improvement further out into the second half of 2013. For 2014, the Bank is forecasting growth of 2.8 per cent, up slightly from the previous forecast of 2.7 per cent, with similar growth of 2.7 per cent in 2015.
The Bank also lowered its forecast for inflation, and extended how long it expects it to remain below the inflation target of 2 per cent (i.e. mid-2015). This represents a considerable shifting of the goalposts; only three months earlier, the Bank projected that this would happen sometime in the second half of 2014.
Much of the rest of the Bank’s April policy rate announcement reiterated its views communicated in its previous statement in March. Notably, the Bank is more comfortable about trends for household debt and the housing sector, describing developments in the latter as “constructive”.
The bottom remains that interest rates this year are going nowhere fast. What’s new is that they’re not likely to be going to be going anywhere fast throughout all of 2014 either, particularly given that inflation expectations remain extremely well anchored.
The Bank does not want to be seen as changing its tune too dramatically, or fuelling expectations that it might even be forced to cut rates. For that reason, the Bank indicated that its next move will likely be to raise interest rates, albeit not for some time. That said, that’s now so far into the future that the Bank is really saying is “we’re not going to raise interest rates.”
As of April 17th, 2013, the advertised five-year lending rate stood at 5.14 per cent, down 0.1 percentage points from the previous Bank rate announcement on March 6th. The five-year rate had previously remained at 5.24 per cent since the beginning of June 2012.