Wednesday, March 6, 2013

Canada holds rate, current stance right for "period of time"

    Canada's central bank left its target for the benchmark overnight rate steady at 1.0 percent, as expected, saying its current accommodative policy stance is appropriate for the time being given the slack in the economy, the muted outlook for inflation and a better balance in household finances.
    But the Bank of Canada (BOC) added its "considerable monetary policy stimulus" will still have to be withdrawn at some point to meet its 2.0 percent inflation target, maintaining a slight bias toward raising rates.
    The BOC started warning financial markets in April that it would have to raise rates but last month pushed back the expected timeframe for raising rates, saying a tightening was less imminent than previously anticipated due to a more muted outlook for inflation and the beginnings of a more balanced financial situation for households.
    The bank said in its statement that it expects the "growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels."
    Canada's economy expanded by an annualized 0.6 percent in the fourth quarter, the bank said, with solid domestic growth offset by a sharp reduction in the pace of inventory investment.
    "The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment," the BOC said.

    Exports, however, are likely to remain below their pre-recession peak until the second half of 2014 due to restrained foreign demand and "ongoing competitiveness challenges, including the persistent strength of the Canadian dollar," the bank said.
     The BOC said the global economic outlook was largely in line with its forecast from January and global financial conditions remain stimulative. Fiscal drag in the United States over the next two years is likely to be more front-loaded than expected due to the current sequestration budget cuts and the recession in Europe continues.
    Growth in China, however, has improved while economic activity in other major emerging countries is expected to benefit from policy stimulus, the bank said.
    Inflation in Canada has been more subdued than expected and headline and core inflation is expected to remain low in the near term before gradually rising towards 2.0 percent as the economy returns to full capacity.
    Canada's headline inflation rate eased to 0.5 percent in January from 0.8 percent in December.
    Compared with the third quarter, Canada's Gross Domestic Product rose by 0.2 percent in the fourth quarter for year-on-year growth of 1.1 percent.


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