New Bank of Canada governor Poloz stays the course

The Bank of Canada announced on July 17th 2013 that it was keeping its trend-setting overnight lending rate 1 per cent, where it has been since September 2010.

Guidance about what to expect going forward was reworded slightly, but the bottom line remains the same, namely, that in an environment of moderate economic growth and low inflation, interest rates will remain on hold for some time yet.

The Bank expects Canadian economic growth to be “choppy” in the near-term owing to some “unusual temporary factors”. The Monetary Policy Report (MPR) which accompanied the statement went into more detail, keying specifically on the recent flooding in Southern Alberta and the Quebec Construction Strike.

These two events are expected to result in weaker than expected economic growth in the second quarter of the year (1.0 per cent). However, given the “temporary nature of the shocks and the eventual reconstruction and repair of damaged infrastructure in the flooded areas in Alberta”, the Bank expects a robust 3.8 per cent expansion in the third quarter.

Overall, the Bank now expects economic growth of 1.8 per cent in 2013, which is an upward revision from the 1.5 per cent projected back in April. The outlook for 2014 and 2015 was little changed, with the Bank forecasting growth of 2.7 per cent in both years.

On the Canadian housing market, the Bank still sees a “constructive evolution of household imbalances”, adding that “recent increases in fixed-term mortgage rates will also provide a degree of restraint”. And while the Bank did acknowledge the rebound in recent months for new construction, resale activity, and prices, at this point the Bank views these simply as variation around a still positive trend.

The Bank noted that “inflation has been low in recent months and is expected to remain subdued in the near term”. The Bank still expects that inflation will not return to its 2 per cent target until mid-2015.

The forward guidance on the future path of interest rates was reworded, dropping the direct reference to rake hikes in favour of the phrase “a gradual normalization of policy interest rates”.

That said, it means the same thing, namely, that while economic growth is expected to pick up heading into 2014, it will take time to absorb the “significant slack in the Canadian economy”. That means low inflation and low interest rates will persist for some time, but will eventually be followed by small and gradual rates hikes when and if conditions eventually return to “normal”.

As of July 17th, 2013, the advertised five-year lending rate stood at 5.14 per cent, unchanged from the previous Bank rate announcement on May 29th.

(CREA 07/17/2013)

Jashan Grewal

Jashan Grewal

CENTURY 21 Coastal Realty Ltd.
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