Wednesday, March 5, 2014

Canada holds rate, softens warning of low inflation risks

    Canada's central bank held its target rate for the overnight rate steady at 1.0 percent, as widely expected, and said inflation is still expected to remain "well below" the bank's target for some time so "the downside risks to inflation remain important," while the risks from high household debt have not materially changed.
    The Bank of Canada (BOC), which has maintained its rate since September 2010, added that "the timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks."
    The BOC softened its earlier concern over inflation following an acceleration of inflation in January and December. In its previous statement in January, the central bank said the "downside risks to inflation have grown in importance."
    Canada's inflation rate has risen in the last three months, hitting 1.6 percent in January, after it fell to a revised low of 1.0 percent in October that had first triggered the central bank's concern. But the recent acceleration has eased some of its worry, with BOC Governor Stephen Poloz saying last month that the rise had made the bank feel "a little more comfortable," a remark that made it clear to most analysts that the central bank was no longer thinking about cutting rates.
    The BOC in January revised its inflation forecast downwards, projecting inflation of 0.9 percent in the first quarter of 2014, down from a previous forecast of 1.2 percent.
    The central bank, which targets inflation of 2.0 percent, also said in its January inflation report that it first expected inflation to return to its target in about two years and said today that inflation is still roughly as it had projected though it admitted that the actual inflation readings were slightly higher.
    "Excess supply in the economy and competition in the retail sector will likely keep inflation well below the 2 percent target this year," the BOC said.
    The central bank said it still expects underlying economic growth of around 2.5 percent this year with the first quarter likely to be a bit softer despite a slightly stronger than expected result in the fourth quarter of 2013.
   "Exports have been a little stronger than previously thought but continue to underperform," the BOC said, adding that business investment has yet to pick up while it continues to expect a soft landing in the housing market and a stabilization of households' debt-to-income ratio.
    Canada's Gross Domestic Product expanded by an unchanged 0.7 percent in the fourth quarter of 2013 for annual growth of 2.66 percent, the fourth quarter of accelerating growth.
    The BOC also said the global economy was evolving largely as it had expected with growth strengthening this year and 2015. 
    It noted that "tensions in Ukraine have added to geopolitical uncertainty," but did not make any further comments though it also said that volatility in global financial markets had increased, reflecting the buoyant market conditions in the advanced economies and "increased risk differentiation among emerging markets."


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