Wednesday, October 23, 2013

Canada holds rate, drops tightening bias, cuts forecast

    Canada's central bank held its policy rate steady, as expected, but dropped its slight tightening bias due to lower-than-expected economic activity from weaker global growth and said the "substantial monetary policy stimulus currently in place remains appropriate."
    The Bank of Canada (BOC), which has maintained its target for the overnight rate at 1.0 percent since September 2010, said "uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment," and cut its growth forecasts.
    Third quarter annual growth in Canada's Gross Domestic Product is forecast at 1.7 percent, down from a previous forecast of 2.1 percent, while fourth quarter growth is forecast at 2.0 percent, down from 2.4 percent.
    On average, growth this year is forecast at 1.6 percent, down from a previous forecast of 1.8 percent, 2.3 percent in 2014, down from 2.7 percent, and 2.6 percent in 2015, down from 2.7 percent, when the economy is expected to reach full capacity.
    In the second quarter, Canada's GDP rose by 0.4 percent from the first for annual growth of 1.4 percent, largely steady from 1.36 percent in the first.
    The BOC, which has often expressed concern over high household debt, said slower growth of household credit and higher mortgage rates point to a gradual unwinding of household imbalances and it expects a better balance between domestic and foreign demand over time and that growth will become more self-sustaining.
    But the dynamic of the global economy has changed, with the composition of growth slightly less favourable for Canada, the bank said.
   "The U.S. economy is softer than expected but as fiscal headwinds dissipate and household delivering ends, growth should accelerate through 2014 and 2015," the BOC said in its monetary policy report, adding that Europe's recovery has surprised on the upside while China's economy was showing renewed momentum, and growth in a number of emerging countries had slowed.
    Canada's inflation rate remains subdued, the BOC said, adding that core and headline inflation are expected to return slowly to 2 percent around the end of 2015.
    However, the BOC added that the fact that inflation has been persistently below target meant that downside risks assume increasing importance. Canada's inflation rate was steady at 1.1 percent in September and August.
    The BOC started to warn financial markets in April 2012 that it would have to raise interest rates at some point to keep inflation at bay but economic growth then slowed in the second half of the year, trimming household spending, and in January this year, the BOC conceded that a rate rise was less imminent than expected.
     Although the BOC still maintained its bias toward tightening and normalizing monetary policy through May, the arrival of a new Governor Stephen Poloz, who took over from Mark Carney, now at the Bank of England, was accompanied by a slight change to the wording of its guidance in July.
     At its previous meeting in September, the BOC repeated this guidance, saying it would eventually normalize rates as economic conditions returned to normal.


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