Although the economic climate appears to be improving domestically and elsewhere, the Bank of Canada stated on Wednesday that its view “balances the many upside and downside risks to inflation,” signaling that it will continue to keep interest rates near their record lows for the foreseeable future.
In his first direct act as Governor of the Bank of Canada since Mark Carney departed on July 1st, Stephen Poloz, allowed the overnight borrowing rate to remain at 1.00%. The rate has been unchanged since September of 2010.
Mr. Poloz also used the occasion to contribute the the BoC’s quarterly Monetary Policy Report; a report that provides insight into economic conditions and potential pressures to growth forecasts. On Wednesday, the report indicated that Canada’s economy is “expected to be choppy in the near term,” and forecast a growth increase of 1.80% this year (up from 1.50% in the April report), however more telling, was the retracted growth forecast in the second quarter of 2013 to 1.0%. Growth however, may be endangered by the “failure to contain the crisis in Europe, and weaker growth in China and other emerging-market economies.”
In the United States, growth is expected to remain modest at 1.70% this year, detracting from the 2.0% forecast in April; however the economy will accelerate to 3.10% growth in 2014, “with the continued strengthening in private demand partly offset by the impact of fiscal consolidation.”
Expansion in the global market is estimated to be moderate “although the pace of economic activity varies significantly across the major economies,” the central bank stated. In particular, economically Japan is seen as strengthening their fiscal structure, whereas China has slowed and the Eurozone continues to remain in dangerous negative territory.
In my opinion, and as I stated over numerous articles, in-depth or in passing, our most significant danger is not domestic failure, but the foreign pressures of the perilous state of affairs in the Eurozone, and the inherent risks associated with trusting in a major economic recovery in the United States; the problem is that the global market has tied together the major economies of the world in a way that has the potential for further catastrophe, and in Canada, as I stated before, consumers will not ‘re-up’ their borrowing to fill the $50 Billion gap that business investment and export cannot plug. This means that, despite the Bank of Canada’s posturing on the idea of normalization of economic conditions resulting in achieving the 2.0% inflation target and stabilization of interest rates, it just will not happen. Moreover, Poloz could not have raised rates in his first rate announcement because it would mark him as too fiscally optimistic (i.e. the idea that the economy and consumers would be able to handle the rate increase). Fiscal conservatism is the name of the game, and everyone must toe the line. I believe, aside from micro-changes to rates, we will not see any significant shift until 2014, more specifically in the Spring/Summer. This of course, remains dependent upon economic conditions continuing to improve in the United States, and more importantly, Europe being able to get its fiscal house in order.
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Century 21 Desert Hills Realty and EQ Lending Corp.
Broker/Owner of EQ Lending Corp.