Bank of Canada Leans Away From Interest Rate Hike

Date: Wednesday, January 23rd, 2013


The Bank of Canada lowered its growth forecast for 2013 today, keeping its benchmark interest rate steady at one per cent for the 19th consecutive time.

The bank also lowered expectations for how much it thinks the economy will expand in 2013 to two per cent. In October, it had estimated 2.3 per cent growth in gross domestic product for the year.

“The slowdown in the second half of 2012 was more pronounced than the Bank had anticipated,” the bank said in a statement posted on its website today.

As well, Canada’s economy can no longer count on household spending and the housing sector to propel it forward.

In a change from previous reports, the bank says Canadian household debt is stabilizing at around the record 165 per cent of annual disposable income, and credit growth has sharply declined from a peak of 12 per cent in 2008 to 5.5 per cent in 2012, and 3.0 per cent in the three months to November.

Home sales have fallen, as has construction activity, and prices may follow suit.

The bank ended its policy announcement by saying: “Some modest withdrawal of monetary policy stimulus will likely be required over time … [but] the timing of any such withdrawal is less imminent than previously anticipated.”

In layman’s terms, that’s the bank’s way of saying it is less likely to raise rates than it used to be.

“At a minimum that removes talk of 2013 hike risk and should cause a change in consensus forecasts,” Scotiabank economist Derek Holt noted.

The value of the Canadian dollar in U.S. currency fell 0.7 per cent to $1.0012 US in the afternoon, and briefly passed below par in the morning before rebounding.

The central bank’s benchmark rate has been at one per cent for more than two years.

“This is an even more dovish turn for the Bank of Canada than we had anticipated, but it supports my bias that the [bank] is very possibly on hold through 2013-14,” Holt said.