Tuesday, October 23, 2012

Canada holds rate, tweaks guidance, raises 2012 forecast

    The Bank of Canada held its benchmark overnight target rate unchanged at 1.0 percent, as widely expected, and while the bank tweaked the language of its forward guidance, it repeated the same message that a "modest" rate rise may be necessary to keep inflation on target.
    The BOC, which has held rates steady since September 2010, also raised its 2012 growth forecast to 2.2 percent, up from a July forecast of 2.1 percent, held the 2013 forecast steady at 2.3 percent, but cut the 2014 growth forecast to 2.4 percent from a previous 2.5 percent.
    On Wednesday the BOC will release its quarterly Monetary Policy Report (MPR) and it had been expected to adjust forecasts following a speech by Governor Mark Carney this month that described the angst that has gripped financial markets and the synchronous slowdown in the global economy.
    The central bank said core inflation had been lower than expected in recent months but should increase gradually in coming months, reaching 2 percent by mid-2013. Overall inflation has also fallen below 2 percent but is projected to return to target by the end of 2013, later than anticipated.
    Canada's annual inflation rate in September was unchanged from August at 1.2 percent, in the lower range of the bank's 1-3 percent target. Last month the bank said it expected both consumer price and core inflation to return to 2 percent in the next year.
    The BOC said the global economy was unfolding largely as it had forecast in its July policy report with the U.S. expansion at a gradual pace and Europe continuing to contract. But growth in China and other major emerging economies had contracted more than expected though there are signs of stabilization.
     It also noted the improved global financial conditions, helped by policy actions by major central banks, but added: "sentiment remains fragile."
    Global headwinds continue to restrain Canada's growth but consumption and business investment is expected to drive the country's growth that should reach full capacity by the end of 2013. Housing activity is expected to decline while household debt burden is expected to rise further before stabilizing by the end of the bank's forecast horizon, the bank said.
    Canada's Gross Domestic Product has expanded by a quarterly 0.5 percent the last three quarters in a row for a second quarter annual growth rate of 2.5 percent, up from 1.8 percent in the first quarter.
    Based on the deterioration in the global economy, financial markets had expected the BOC to moderate its forward policy guidance and remove the reference to future tightening.
    But the BOC repeated its past warning that a "modest" tightening in the future should be expected.
    "Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector," the BOC said.
    This statement compares with the BOC's previous statement that was used since April.
    "To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term."

1 comment:

  1. Things have been looking up for Canada lately. With enough business investments, who knows how much better things can get.