Wednesday, September 3, 2014

Canada maintains rate, still neutral about policy change

    Canada's central bank maintained its benchmark target for the overnight rate at 1.0 percent, as widely expected, and repeated its guidance from July that it "remains neutral with respect to the next change to the policy rate: its timing and direction will depend on how new information influences the outlook and assessment of risks."
    The Bank of Canada (BOC), which has maintained its policy rate since September 2010, also said the risks to the outlook for inflation remain roughly balanced while the risks associated with household imbalances have not diminished, a clear sign that it remains concerned about how future changes to its interest rates will affect households with high debt loads.
    It noted that activity in Canada's housing market had been stronger than anticipated.
    Last month the BOC raised its forecast for inflation to average 2.2 percent in the fourth quarter of this year but then fluctuate between 2.0 and 1.9 percent in 2015.
    The BOC, which targets inflation of 2.0 percent, said inflation is evolving as it expected and recent data reinforce its view that the rise in inflation seen earlier this year was due to the temporary effects of higher energy prices, pass-through from exchange rate fluctuations and other specific factors.

    In July Canada's headline inflation rate eased to 2.1 percent from June's 2.4 percent and May's 2.3 percent.
    Although the global economy is developing as the BOC expected, it added that "the recovery in Europe appears to be faltering as the situation in Ukraine weighs on confidence."
    Regarding the United States, the BOC said "a solid recovery seems to be back on track, with business investment now making a significant contribution to growth," while global financial conditions remain "very stimulative" and long-term bond yields have eased even further.
    A pickup in Canada's economic growth in the second quarter after a weak winter has brought Gross Domestic Product to almost exactly the level the BOC had predicted in July, with exports surging due to strong U.S. investment spending and the effect of the past depreciation of the Canadian dollar.
    In the second quarter, Canada's GDP expanded by 0.8 percent from the first quarter for annual growth of 2.45 percent, up from 2.14 percent in the first quarter.
    Although a growing number of Canadian export sectors appear to the turning the corner toward recovery, the BOC said this will still need to be sustained before it translates into higher business investment and hiring.
    "The Bank still expects excess capacity in the economy to be absorbed during the next two years," the BOC added.
    Economists had widely expected the BOC to maintain its rates today but are looking for any change to its tone and guidance as the improving economy is expected to lead to a rate increase around the middle of next year.



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