Wednesday, April 16, 2014

Canada holds rate, change depends on new information

    The Bank of Canada (BOC), maintained its policy rate at 1.0 percent, as widely expected, and reiterated that "the timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks."
    The BOC also repeated its view from March that underlying inflation is expected to remain below its 2.0 percent target "for some time" so the downside risks to inflation remain important while at the same time the risks associated with household imbalances remain elevated.
    "In sum, the Bank continues to see a gradual strengthening in the fundamental drivers of growth an inflation in Canada," the BOC said, adding this view was based on a projected upturn in exports and investment.
    In its latest monetary policy report, the BOC trimmed its growth forecasts but raised the inflation forecasts slightly. On average, however, the BOC still sees growth averaging about 2.5 percent in 2014 and 2015 before easing to around the growth rate of the economy's potential of 2.0 percent in 2016.
    Annual growth in Canada's Gross Domestic Product is forecast at 2.3 percent in the first quarter of this year, unchanged from the January's forecast, then 2.4 percent in the second quarter and third quarters, down from a previous forecast of 2.5 percent, and 2.3 percent in the fourth quarter, down from 2.5 percent.
    In the fourth quarter of 2013, Canada's GDP expanded by 0.7 percent from the third quarter for annual growth of 2.66 percent, up from 2.16 percent and the fourth quarter of accelerating growth.
    Economic growth last year averaged 2.0 percent, up from 1.7 percent in 2012, and the IMF has forecast 2014 growth of 2.3 percent and 2.4 percent in 2015.
    Although the BOC expects global growth to strengthen over the next three years, it said Canada's exporters will continue to face challenges to benefit from stronger growth though the lower Canadian dollar should provide some support and high oil prices will help stimulate investment.
    Inflation in Canada remains low and the BOC expects core inflation to remain below 2.0 percent this year due to economic slack and stiff retail competition and this will continue until early 2016.
    Higher consumer prices and the lower Canadian dollar, however, will put some upward pressure on consumer price inflation, pushing it closer to the bank's 2.0 percent target in coming quarters.
    In its policy report, the BOC forecast consumer price inflation of 1.3 percent in the first quarter of this year, up from its January forecast of 0.9 percent, 1.6 percent in the second quarter, 1.8 percent in the third quarter and 1.9 percent in the fourth quarter.
    "We expect total CPI inflation will remain close to target throughout the projection, even as upward pressure from energy prices dissipates, because the impact of retail competition will gradually fade and excess capacity will be absorbed," the BOC said.
     In February, Canada's headline inflation rate eased to 1.0 percent from 1.5 percent in January. The IMF forecast headline inflation to rise to 1.5 percent in 2014 and 1.9 percent in 2015.
     Core inflation is forecast at 1.2 percent in the first quarter, up from 1.0 percent in its previous forecast, 1.2 percent in the second quarter, unchanged from January, 1.4 percent in the third quarter and 1.6 percent in the fourth quarter.
    The BOC said it was still expecting a soft landing in the housing market and debt-to-income ratios to stabilize, but cautioned that imbalances remain high and "would pose a significant risk should economic conditions deteriorate."

    www.CentralBankNews.info


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