Bank of Canada Sticks to previous forecasts

Mark Carney, governor of the Bank of Canada, stuck to his forecast yesterday that unprecedented monetary and fiscal stimulus will lead to a solid rebound in the Canadian economy next year, prompting one economist to speculate the bank may trim interest rates only 25 basis points at its next announcement in March or even hold steady before raising rates late in the year.

Mr. Carney, who was before MPs on the House of Commons finance committee, spoke confidently of the central bank's economic outlook, which expects a deep economic decline this quarter before the economy roars back to life late in 2009 and posts growth of 3.8% in 2010 -- well above the outlook of most private-sector economists.

As it happened, economists at the University of Toronto's Rotman School of Management issued a forecast late on Monday that is in line with the central bank's forecast -- meagre growth beginning in the third quarter, building toward output of 3.7% in 2010.

"We don't do optimism, we don't do pessimism. We do realism at the Bank of Canada," Mr. Carney said in response to a question about his optimistic outlook. "We don't do spin."

In his opening statement, he said Canada's central bank had cut rates "deeper and sooner" than most other global peers. "With the strains in our financial system considerably less than elsewhere, monetary conditions have eased significantly in Canada since the start of the crisis."

The benchmark lending rate stands at 1% after the Bank of Canada cut rates by 350 basis points since December, 2007.

Mr. Carney added that Canada is in the "unprecedented" situation of having negative real interest rates -- or interest rates lower than core inflation rates -- as it deals with this global financial downturn. "In time, this will have a powerful impact on economic activity and inflation."

One analyst said those comments suggest the widely anticipated 50-basis-point cut in March may no longer be in the cards.

"This strongly suggests that the bank's sense of easing urgency is waning," Michael Gregory, senior economist at BMO Capital Markets, said in a note. "We look for any future rate cuts to be the quarter-point variety and wouldn't be surprised if they skipped" a rate cut at the March 3 decision date.

In an interview, Mr. Gregory said Mr. Carney's testimony revealed the central bank's computer models indicated growth would be much stronger, but that was pared back for the official forecast.

"To me, Carney is saying they have done a lot, and the conditions are ripe for the economy to take off once financial markets globally right themselves a little bit," he said.

Further, Mr. Gregory said there is a chance the bank could begin raising rates late this year should the forecast, as envisaged, come to pass. Growth in the third and fourth quarters, in the central bank's scenario, is set to climb 2% and 3.5%, respectively.

Not everyone shares this view. TD Securities said in a note it still believes the bank "will likely" deliver a 50-basis-point cut on March 3. Derek Holt, vice-president of economics at Scotia Capital, said he's anticipating a half-percentage-point drop.

"It doesn't matter what the bank thinks about growth in 2010," Mr. Holt said. "The more important thing is that the bank continues to say inflation will not to be an issue until 2011."

The bank's benchmark lending rate is set to ensure inflation hits a preferred target of 2%.

Mr. Carney told MPs the bank will continue to monitor developments to judge whether or not further monetary stimulus will be required.

-1.2%

Bank of Canada forecast contraction for 2009

+3.8%

Bank of Canada growth forecast for 2010

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