Bank of Canada softens stance; but rate hike still on the horizon;
OTTAWA — After months of staring down increasingly threatening economic data here and abroad, the Bank of Canada appears to have blinked — ever so slightly.
The central bank on Wednesday did what it has done for more than two years — leaving its near-rock-bottom interest rate unturned.
But the wording behind the decision to keep its trendsetting lending level at 1% has been softened somewhat, highlighting concerns over continued slack in the economy and pointing to a possible extension of the holding pattern.
“With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” policymakers said.
The Canadian dollar weakened to a session low against the U.S. dollar after the Bank of Canada softened its stance on the need for interest rate hikes.
The Canadian dollar weakened to C$1.0328 to the greenback, or 96.83 U.S. cents, compared with C$1.0288 just before the central bank announcement and $1.0280 at Tuesday’s North American close.
The bank’s key rate has remained at the same level since September 2010.
Missing on Wednesday, however, was the phrase “the timing of any such withdrawal is less imminent than previously anticipated,” which has accompanied recent rate announcements.
No doubt, economists will be sifting through those words in the coming days for signs of movement on the rate front.
Mark Carney, who will leave his post as bank governor June 1 to head the Bank of England, has been walking a fine line as weak inflation, lagging exports and business investment – as well as a stronger Canadian dollar —limit his policy options.
Uncertainty over Europe, which seems to crawl from crisis to crisis, and the ongoing fiscal deadlock in the United States have likewise dampened the growth outlook in this country.
The Canadian economy grew by a disappointing 1.8% in 2012, compared to 2.6% the previous year. Both the Bank of Canada and the Finance Department have previously forecast growth of around 2% for 2013 — although private-sector economists are expecting a weaker performance, and Finance Minister Jim Flaherty has acknowledged the pace could fall behind his previous estimates.
Mr. Flaherty will meet with senior economists on Friday to gather their growth forecasts for the federal budget, expected near the end of March.
In Wednesday’s statement, the Bank of Canada continued to strike the positive tone of its quarterly Monetary Policy Report released in January.
It still expects the economy to pick up through 2013, “supported by modest growth in household spending, combined with a recovery in exports and solid business investment.”
The Bank of Canada’s target inflation rate is 2%, within a band of 1% to 3%. But the annual pace of price increases have been well below that goal.
The overall inflation rates was 0.5% in January from a year earlier, while the core index — stripping out volatile items such as some energy and food products — eased to 1% during the month.
Inflation is expected to “remain low in the near term before rising gradually to reach 1% over the projected horizon as the economy returns to full capacity and inflation expectation remain well-anchored,” the bank said Wednesday.
Compliments of Toni Iannetti