CBC News

Bank of Canada ends rate hike warning, cuts growth outlook

The Bank of Canada has held its key interest rate at one per cent and cut its outlook for economic growth from now until 2015.

In its monetary policy report released today by Governor Stephen Poloz, the central bank has cut its outlook for economic growth to 1.6 per cent this year, 2.3 per cent in 2014 and 2.6 per cent in 2015, a sizable downgrade from its July outlook. The bank says it sees the economy returning to full capacity by the end of 2015.

The statement also removes the bank’s warning that a rate hike is inevitable, a “major turn in guidance,” according to Andrew Pyle, senior wealth adviser and portfolio manager at Scotia McLeod.

The central bank had adopted a stated bias towards hiking rates in April 2012 to caution consumers about over-borrowing.

The change in guidance has led to the assumption among market watchers that it is just as likely the bank will cut the key one per cent overnight rate in the future as hike it.

At a news conference following the release of the bank’s monetary policy report and rate announcement, Poloz made no effort to dissuade markets from that assumption.

“The statement is making it clear we have balanced the risks,” Poloz said. “If we were to receive more data flow that was more negative for that inflation outlook, then we would need to rethink that balance.”

The Bank of Canada says softer-than-expected U.S. growth pushed its economic forecast lower, but that it expects “a better balance between domestic and foreign demand will be achieved over time and that economic growth will become more self-sustaining.”

In its July report, the bank had predicted the Canadian economy would grow 1.8 per cent this year, followed by 2.7 per cent in 2014 and 2015, returning to full capacity in mid-2015. But Poloz is now more pessimistic.

“In Canada uncertain global and domestic economic conditions are delaying the pick up in exports and business investment, this leaves the level of economic activity lower-than-expected,” he said.

The announcement sent the Canadian dollar plummeting, down 0.92 cents against the U.S. dollar to 96.28 cents US in late afternoon trading.

That won’t be the end, according to Pyle, who says he sees the Canadian dollar falling to 92 cents US within a month, and that he believes Poloz is attempting to push the dollar down to boost exports.

“Exports were supposed to be the engine of growth for the economy, out of 2013, through to 2014. It’s clearly not happening,” Pyle said in an interview with CBC’s Lang & O’Leary Exchange.

“I would bet right now the Bank of Canada would like a little bit of juice from the currency, whether it’s a two to five cent decline, back down to where it’s 90 cents, to get the export sector going.”

The lower economic outlook and stubbornly low inflation mean the Bank of Canada is likely to hold interest rates for at least another two years, Pyle says. For people with variable rate mortgages, that could mean no change until 2016, but he warns that higher bond yields may push up rates for people looking at a mortgage with a five-year term.

TD Bank says it now believes rates will stay unchanged until 2015, according to commentary by economist Diana Petramala.

“Interest rate hikes will be gradual and dependent on economic performance and financial conditions going forward, with the bank keeping a close eye on the evolution of domestic risks,” Petramala

Reuters – By Randall Palmer and Louise Egan

OTTAWA (Reuters) – The Bank of Canada said on Wednesday it will hold its benchmark interest rate steady at 1 percent while the economy remains fragile and inflation stays low, but that it sees rates rising if the economy performs in line with expectations.

The policy announcement, the first under new Governor Stephen Poloz, delivered roughly the same message as those of his predecessor, Mark Carney, over the past year: The next move is a rate hike, not a cut, although it won’t be any time soon.

Still, Poloz, who took over at the helm of the central bank in June, was more explicit in stating that the continuation of steady rates depended on three key trends.

“As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate,” Poloz said at a news conference to announce the bank’s decision.

“Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 percent inflation target.”

But he downplayed the so-called hawkish bias in the statement and made it clear any move was still far in the future.

“We never saw that as some sort of signal that we were on an imminent tightening phase or anything like that,” he said. “Rather it was to help people understand that these are not normal times. So you need to be more prepared for a gradual return to normality.”

Canada’s export-reliant economy has struggled to stay on a growth track after a relatively speedy recovery from the world economic crisis. Inflationary pressures remain muted.

The bank did not provide specific thresholds that could trigger a rate increase.

Poloz listed an array of factors the bank would watch, including more U.S. and global growth momentum, but said it would mostly be a judgment call by the bank.

His comments came as Federal Reserve Chairman Ben Bernanke said the U.S. central bank still planned to start scaling back its massive bond purchase program later this year, but it could change those plans if the outlook shifted.

Poloz said Bernanke’s recent remarks on the so-called tapering of the Fed’s stimulus measures were helpful.

“Markets are learning from that, as are we,” he said.

CAUTIOUS

Following the decision and the new governor’s comments, traders slightly bid up the price of shorter-term bonds, sending yields lower, showing there was little concern the central bank would rush to boost interest rates.

“They tweaked – very, very slightly – the eventual tightening bias, but not in any meaningful way, I don’t think,” said Mark Chandler, head of fixed income and currency strategy at the Royal Bank of Canada.

“Overall, I think it was quite cautious. I’d hate to paint it specifically dovish or hawkish.”

The Canadian dollar weakened to a session low against the U.S. dollar after the statement, sliding to C$1.0445 versus the greenback, or 95.74 U.S. cents. But it quickly regained most of the lost ground.

The central bank has held its overnight rate at 1 percent since September 2010, the longest period between rate changes since the 1950s. Since April 2012, it has been hinting at rate hikes to come, making it the only central bank in the Group of Seven major economies to have a hawkish bias, albeit a mild one.

Market players don’t expect a move until the fourth quarter of 2014.

FLOODS, STRIKE HIT QUARTER

The bank cut its forecast for second-quarter growth sharply – to 1 percent from 1.8 percent – largely due to the impact of catastrophic flooding in Alberta and a strike by construction workers in Quebec. But it said third-quarter growth would more than compensate for that decline. It forecast third-quarter growth of 3.8 percent, up from its previous estimate of 2.3 percent.

That meant the volatility of the two quarters would not play into its policy choices.

The bank said the economy would grow 1.8 percent this year, up from its previous estimate of 1.5 percent. It expected growth of 2.7 percent each year in 2014 and 2015. The 2014 forecast was lowered from the 2.8 percent previously estimated.

The overall growth outlook is little changed from its April forecast, and the bank sees a return to full capacity and inflation rising to its 2 percent target by mid-2015.

On Canada’s once-hot housing market, Poloz did not rule out a rebound even after signs of cooling earlier this year. Household debt has eased but could also pick up again, he said.

“As I read the situation right now, the new data that we have from the housing sector is just as consistent with a soft landing as they might be with a rebound,” he said.

While past statements have referred to the “persistent strength of the Canadian dollar,” the currency has weakened in recent weeks and the bank avoided the phrase.

“In general, we would prefer not to offer a running commentary on the dollar in any case,” Poloz said.

Today provided the release of two reports for the housing and conomic outlook for Canada and the provinces from the third quarter of 2013 looking forward. Well worth the read. Both indicate a much better 2014 than 2013.

Housing Market Outlook – Second Quarter 2013 – http://www.cmhc-schl.gc.ca/odpub/esub/61500/61500_2013_Q02.pdf
Metropolitan Housing Outlook – Spring 2013 – http://genworth.ca/en/pdfs/Metro_Housing_Spring_2013.pdf

CBC News

The Bank of Canada held its benchmark interest rate steady at one per cent today, the last policy decision the bank will make before governor Mark Carney leaves to head the Bank of England.

The bank kept its target for the overnight rate steady at one per cent Wednesday. That’s the same level it has been at for 22 consecutive policy meetings, dating back to September 2010.

The central bank’s rate is the rate at which retail banks borrow money from each other for short-term loans. It’s the basis for the saving and lending rates that they pass on to customers.

In a statement, the bank noted that the Canadian economy performed better than the bank expected in the first part of 2013. But it expects growth to moderate through the year, expanding by about 1.5 per cent as a whole.

That likely isn’t enough to compel the bank to raise rates to slow things down and rein in inflation, nor is it sluggish enough to lower the benchmark rate to stimulate the economy further and spur borrowing.

No changes expected

“Consumer spending is expected to grow at a moderate pace, business investment to grow solidly, and residential investment to decline further from historically high levels,” the bank said. “Growth in total household credit is slowing and the bank continues to expect that the household debt-to-income ratio will stabilize near current levels.”

Next week, former Export Development Canada head Stephen Poloz will begin his tenure at the top of the bank. Most analysts don’t expect any major deviations from policy when that happens.

“We do not expect a change in bias when incoming governor Stephen Poloz begins his tenure,” TD Bank economist Francis Fong said in a note. “We expect a continuation of … policy.”

The central bank hinted that few changes are expected any time soon, saying in its statement that “with continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

That’s the central bank’s way of saying not to expect rates to move anywhere — up or down — any time soon, but it’s leaning toward a slight rate hike at some point.

One possibly game-changer to that plan could be housing.

“I think housing is coming in softer than the Bank of Canada anticipated over the past year in light of, for example, the steep drop in Toronto’s new home sales that will result in much weaker housing starts going forward,” Scotiabank economist Derek Holt said.

“What the [bank[ flags as “the constructive evolution of imbalances in the household sector” may well turn toward a somewhat harsher assessment of housing risks going forward.”

The bank is slated to release its next policy decision in mid-July.

By Greg Quinn – Bloomberg

Bank of Canada Governor Mark Carney kept unchanged both his policy interest rate and his bias to tighten, even as he chopped his growth forecast for 2013 and said that economic slack will persist for more than two years.

Policy makers held the benchmark rate on overnight loans between commercial banks at 1 percent for the 21st consecutive meeting, as expected by all 23 economists in a Bloomberg News survey. The bank also cut its growth outlook for this year to 1.5 percent from 2 percent because of lower business investment and government spending.

“A material degree of slack has re-emerged in the Canadian economy,” policy makers led by Carney, 48, said from Ottawa today. “Considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

Canada is the only Group of Seven economy signaling the potential for higher borrowing costs as the Bank of Japan (8301), European Central Bank and U.S. Federal Reserve press ahead with extraordinary stimulus. Policy makers are counting on exports and business investment to lead the recovery after slumping late last year.

“The shine has really started to come off” the economy, said Derek Holt, vice-president of economics at Bank of Nova Scotia (BNS) in Toronto. Policy makers are “signaling aggressively to markets they aren’t entertaining a rate cut and rates aren’t going anywhere for a long time.”

The Canadian dollar fell 0.6 percent to C$1.0268 per U.S. dollar at 10:12 a.m. in Toronto. One dollar buys 97.39 U.S. cents.

Full Capacity

The Bank of Canada said the economy won’t reach “full capacity” until mid-2015, compared with its January projection of the second half of 2014. Growth will accelerate to 2.8 percent next year, according to the bank, faster than its 2.7 percent outlook in January. The economy will grow 2.7 percent in 2015, it said.

With the slower-than-expected expansion in 2012 and 2013, Canada’s economy is now about 1.25 percent below full output, the bank said, greater than the 1 percent estimate it gave in January.

That slack will keep inflation below the bank’s 2 percent target until the second quarter of 2015, the bank said, longer than the previous estimate for the third quarter of next year.

The country’s inflation rate was 1.2 percent in February, keeping price increases below the central bank’s 2 percent target for a 10th straight month.

Canada also lost 54,500 jobs in March, boosting the unemployment rate to 7.2 percent from 7 percent.

“The economic numbers in Canada don’t look very good and the outlook is for more of the same,” Ric Palombi, a fixed- income portfolio manager at McLean & Partners Wealth Management in Calgary, said before today’s decision.

Unchanged Rate

The policy rate will remain unchanged until the fourth quarter of next year according to a Bloomberg survey of 15 economists taken April 5 to April 10.

Exports are being hobbled by persistent strength in the Canadian dollar, which is being supported by haven flows and the impact of loose monetary policies elsewhere, the bank said in its report.

Consumer debt burdens will probably stabilize around the current record 165 percent of disposable income, after being elevated in part by a rise in housing investment, the central bank said today. There are still signs of “overbuilding” of multiple-unit housing in some cities, it said.

Flaherty has acted four times to make mortgage lending rules more restrictive on concern that Vancouver and Toronto markets were overheating. His March 21 budget also outlined the slowest spending growth since the 1990s to meet an election promise to eliminate a deficit by 2015.