BoC keeps rate and expectations unchanged

BoC keeps rate and expectations unchanged

But changes on forward guidance.

Jul 17, 2013 Julian Beltrame, The Canadian Press 0
OTTAWA – The Bank of Canada is mostly sticking to the same script under new governor Stephen Poloz, maintaining the trendsetting policy rate at the super-low level of one per cent and declaring the monetary stimulus will remain until conditions improve.

Some analysts had anticipated that the first policy announcement and quarterly economic report since Poloz took charge on June 1 would be an opportunity to set a new course from his predecessor Mark Carney, but except for some new, expansive language, there was little sign the two men see the world differently.

Global conditions remain weak, but the bank sees some hope for a pick-up in Canadian growth starting the second half of this year as the U.S. economic recovery firms and helps boost Canadian exports. And the bank continues to see external conditions as a chief impediment to a strong domestic recovery.

“While real (gross domestic product) growth in the first quarter of 2013 was stronger than expected, the bank foresees a somewhat more challenging external environment over the projection horizon than previously anticipated,” it states.

“This reflects slightly reduced expectations for global economic growth, which contributes to a lower profile for commodity prices.”

The bank did adjust upwards Canada’s growth rate for this year to 1.8 per cent from its previous call of 1.5 per cent, but that was almost entirely due to a stronger than anticipated first quarter.

As well, the bank sees the just past second quarter being set back by the Alberta floods and a mid-June Quebec construction strike to one per cent growth, but with both disruptions ending, the third quarter will make up the difference with a 3.8 per cent rebound.

Evening out the choppy quarters, the bank expects the economy to expand at a rate of 2.7 per cent in 2014 and 2015, little change from the April forecast of 2.8 and 2.7 growth in the two years.

The big difference observers will note is that the Poloz bank has changed the language on the tightening bias pointing to higher interest rates, dropping the reference to “considerable monetary policy stimulus” likely remaining appropriate “for a period of time.” But it is likely to be interpreted as a distinction without a difference.

The new forward guidance makes clearer that as long as there is considerable slack in the economy, which won’t be absorbed until mid-2015, inflation pressures remain muted and household finances continue to improve, the current interest rate setting remains appropriate, adding:

“Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the two per cent inflation target.”

That suggests Canadians should expect to enjoy super-low borrowing rates until at least the end of 2014 and possibly well into 2015.

Other major change is the statement is that the bank has dropped its specific reference to the “persistent strength of the Canadian dollar” as a drag for exports, instead substituting the more generic “ongoing competitive challenges.” The loonie has weakened in the past few months and is currently hovering around 96 cents US.

Still, the bank is counting exports to eventually take the Canadian economy out of the slow lane as demand in the U.S. picks up, which it believes will also boost confidence and boost business investment.

“After picking up sharply in the first quarter, exports are projected to continue to increase at a solid pace,” the bank says. “The further recovery in U.S. business and residential investment should particularly benefit those export sectors that have lagged thus far, notably machinery and equipment and lumber products.”

It expects exports to add 0.8 percentage points to gross domestic product output this year, followed by 1.4 points next and 1.3 percentage points in 2015.

As it did in April, the bank welcomes the moderation in borrowing by Canadians despite the low interest rates, noting that household credit has continued to slow to a rate below its historical average.

The bank takes some notice of the recent rebound in the housing market, although it says it expects residential investment to decline further from historically high levels to a “more sustainable path.”

On the global economy in general, the bank has downgraded growth this year by 0.2 percentage points to 2.8 per cent, with rebounds of 3.5 per cent and 3.7 per cent in 2014 and 2015, both moderately lower than it had previously projected. The change reflects slowing economic growth in China and other emerging countries, the bank said, and continued weakness in Europe.

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