Wednesday, December 4, 2013

Canada holds rate, sees greater downside inflation risks

    Canada's central bank maintained its policy rate at 1.0 percent, as widely expected, and said the "substantial monetary policy stimulus currently in place remains appropriate" but cautioned that the downside risks to inflation "appear to be greater."
    The Bank of Canada (BOC), which has maintained its target for the overnight rate at 1.0 percent since September 2010, also said that the risks associated with "elevated household imbalances have not materially changed" and economic growth is broadly in line with the bank's forecast from October.
    Last month the BOC dropped its slight tightening bias due to weak global growth that was delaying an expected improvement in Canada's exports and business investments. It also for the first time said the persistently low inflation meant that downside risks was becoming more important.
    Canada's headline inflation rate fell to a five-month low of 0.7 percent in October from 1.1 percent due to lower gasoline prices while the core inflation rate fell to 1.2 percent from 1.3 percent.
    The BOC, which targets 2.0 percent headline inflation, said "inflation has moved further below the Bank's 2 percent target," and that core inflation was being held down by excess supply and heightened competition in the retail sector, which "looks to be more persistent than anticipated."
    The global economy is still expanding at a modest rate, as the BOC expected, while Canada's economy expanded by a faster-than-forecast 2.7 percent in the third quarter, "but its composition does not yet indicate a rebalancing towards exports and investment," the BOC said.
    Non-commodity exports continue to disappoint and while business investment is up, the BOC said it was still recovering more slowly than anticipated and the bank still projects a gradual return to full production capacity by the end of 2015.
    The housing sector, which the bank wants to avoid overheating, has been stronger than expected but it added this was consistent with updated demographic data and a pulling forward of home purchases in light of the favorable financing conditions.
    "The Bank continues to expect a soft landing in the housing market," the BOC said.
    The BOC's adoption of a neutral policy stance last month meant that economists pushed back their forecasts for a rate rise by around six months to the second quarter of 2015.
    The International Monetary Fund also forecasts that the BOC is unlikely to raise rates before early 2015 with economic growth forecast to rise to 2.25 percent in 2014 from 1.6 percent this year.
    However, the Organization for Economic Co-operation and Development (OECD) said the BOC may need to start raising rates in the fourth quarter of 2014 to avoid a build-up of inflationary pressures and then push it to 2.25 percent by the end of 2015.


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