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.
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.
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.