Canada Retains Rate at 1% Amid ‘More Modest’ Recovery

Date: January 17th, 2012

Greg Quinn (Bloomberg) – Jan 17, 2012 10:31 AM ET

The Bank of Canada kept its main interest rate unchanged for an 11th consecutive meeting and said economic growth will be “more modest” amid a weaker outlook for the U.S. and Europe.

The Ottawa-based central bank left the target for overnight loans between commercial banks at 1 percent, where it has been since September 2010, as forecast by all 26 economists surveyed by Bloomberg News.

The rate pause is the longest since the central bank adopted the overnight target as its policy rate in 1994, and longer than the “conditional commitment” to hold it at 0.25 percent that lasted from April 2009 to June 2010. European governments are struggling to manage a fiscal crisis and U.S. growth will also be hampered by the need to pare debts, the Bank of Canada said today.

“While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment,” policy makers led by Governor Mark Carney, 46, said in a statement. “There is considerable monetary policy stimulus in Canada,” the central bank said, echoing its previous decision.

Slower Growth Ahead

Canadian bonds trimmed losses after the announcement with yields, which move inversely to prices, declining. The benchmark 2-year government bond, which saw its yield rise as high as 0.982 percent, was almost unchanged from yesterday at 0.965 at 10:15 a.m. in Toronto. The six-month overnight index swap rate, which measures what investors think the bank’s policy rate will average over that time, was little changed at 0.965 percent.

Canada’s economy, the world’s 10th largest, will expand 2 percent this year and 2.8 percent next year, compared with an October forecast for expansions of 1.9 percent and 2.9 percent, the bank said. The estimate of 2011 growth was increased to 2.4 percent from 2.1 percent.

“A lot of the things that pulled Canada out of the recession quickly can’t continue to lead the way, and now we need help from the rest of the world,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

Carney, who was named chairman of the Financial Stability Board in November, will hold a press conference tomorrow after releasing a detailed forecast in a Monetary Policy Report.

The European Central Bank, Norway and Australia cut interest rates last month to stem the damage from slowing global growth.

‘Rates On Hold’

“The bias is still just to keep rates on hold for the foreseeable future,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto “As long as these external headwinds persist the bank doesn’t have any incentive to take rates higher.”

European leaders have spent two years working to stem their crisis. Standard & Poor’s reduced the credit ratings for nine of 17 European countries including France, Italy and Spain on Jan. 13.

“The Bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks,” the Bank of Canada said. “The Bank expects the U.S. recovery will proceed at a more modest pace going forward, owing to ongoing household deleveraging, fiscal consolidation and the spillovers from Europe.”

Inflation Above Target

Carney’s interest-rate freeze comes even as inflation exceeds his 2 percent target. Consumer prices rose 2.9 percent in November from a year earlier, Statistics Canada said Dec. 20. The average monthly gain in consumer prices through November was 3 percent, on pace for the highest average pace since Canada adopted inflation targets two decades ago.

The central bank predicted in October inflation will slow to 1 percent by the middle of this year. Today, the bank said that the economy will return to full output and the pace of price increases will accelerate back to its 2 percent target in the third quarter of 2013, one quarter earlier than it had forecast.

Some Canadian executives also say that the recovery may be curbed by events abroad, including the U.S., which buys three- quarters of Canada’s exports. RealtyTrac Inc., an Irvine, California-based data vendor, said Jan. 12 that banks may seize more than 1 million U.S. homes this year, a 25 percent increase.

Not ‘Immune’

Canada’s consumers have been steady, Rogers Communications Inc. Chief Executive Officer Nadir Mohamed said on a conference call last month, adding “we’re not going to be immune to what’s happening in the rest of the world, Europe and the U.S.”

The Canadian dollar’s “persistent strength” also remains a challenge to exporters, the central bank said again today.

The Canadian dollar hung onto gains after the announcement. The currency was trading at C$1.0149 per U.S. dollar at 10:15 a.m., from c$1.0179 yesterday. One Canadian dollar buys 98.53 cents.

Finance Minister Jim Flaherty, who has ended a two-year government stimulus program, said last week he will consider new initiatives if there is new major slowdown. On Nov. 8, Flaherty pushed back his target for eliminating Canada’s deficit by a year to 2015 because slower growth will erode revenue.

The Bank of Canada today also reiterated that household debt will keep rising to records, after reaching 153 percent of disposable income in the third quarter. The bank said last month consumer debt is the main domestic risk to financial stability.

The next Bank of Canada rate meeting is scheduled for March 8th 2012

2012 Schedule of BoC interest rate announcements

Date: January 17th, 2012

January 17
March 8
April 17
June 5
July 17
September 5
October 23
December 4

Bank of Canada stays in neutral

Date: December 7th, 2011

CBC – The Bank of Canada on Tuesday held its benchmark interest rate steady at one per cent, with the central bank warning that the country’s economy is performing slightly better than expected but will soon change.

It’s the 10th consecutive policy meeting that the central bank has stood pat.”Uncertainty around the global economic outlook has increased,” the bank said in its latest policy decision. “Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened.”

The bank’s target for the overnight rate is the rate at which banks borrow for short-term loans. Many other interest rates in the consumer sphere are correlated to it, so it is the central bank’s best weapon for heating up or cooling down the economy.

Althought the bank has held the benchmark interest rate steady, it also added a cautionary note.

“The weaker external outlook is expected to dampen GDP [gross domestic product] in Canada through financial, confidence and trade channels,” the bank said.

“The economy also continues to face competitiveness challenges, including persistent strength of the Canadian dollar…. Reflecting all of these factors, the bank has decided to maintain the target for the overnight rate at one per cent.”

Bank to monitor global economy

Choosing to hold steady is another signal that the bank remains concerned about the state of the global economy, but not enough to make credit cheaper to obtain than it already is.

“They gave no hints whatsoever that they were possibly thinking of a rate hike or cut in the months ahead…. they are just not going there,” said Doug Porter, deputy chief economist with BMO Capital Markets.

Porter said the bank would need to see a resolution to the European crisis and sustained stronger growth in the U.S. to entertain raising borrowing costs for Canadians.

To cut interest rates further would likely require Canada falling back into recession, he added.

“The bank will continue to monitor carefully economic and financial developments in the Canadian and global economies …and set monetary policy consistent with achieving the two per cent inflation target over the medium term,” the bank said.

Last week, the central bank moved in conjunction with five other influential central banks to ensure that U.S. dollars are available throughout the world by lowering the fees lenders must pay to access them.

In its statement, the bank said the economy has performed better than anticipated in the latter half of 2011. Statistics Canada data recently found that the economy is expanding at a 3.5 per cent annual pace, ahead of the bank’s projection. And while most private-sector economists expect that to slow to about 1.5 per cent moving forward, that’s still well ahead of the Bank of Canada’s 0.8 per cent expectation.

The central bank raised its target for the overnight lending rate to its current level from 0.75 per cent in September 2010.

The bank meets every six weeks to decide on its interest rate policy. Its governors are next scheduled to meet on Jan 17.

BoC keeps rate unchanged, warns of risks, lower growth

Date: October 25th, 2011

By: Julian Beltrame, The Canadian Press

OTTAWA – The Bank of Canada is hinting it will need to keep interest rates super-low for an extended period to keep stimulating the economy in the face of a scary global environment and recessionary risks.

As expected, the central bank left its target overnight rate at one per cent for the ninth decision date in a row and gave every indication that Canadians can bank on lending conditions staying “stimulative” for many more.

But the tone of the bank’s unusually long accompanying statement was darker than many had expected, even though economists were calling on governor Mark Carney to sharply revise the summer’s more sunny forecast.

The bank’s policy team took the advice to heart. Not only is growth braking dramatically in the industrialized world, even China and other emerging nations can be expected to lower their sights for the near future. Most dramatically, the bank said Europe will most likely now experience a recession — a brief one, it said, although it warned Canadians to stay tuned on that bit of optimism.

“The global economy has slowed markedly as several downside risks… have been realized,” the bank said.

“The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies. The bank now expects the euro area… will experience a brief recession.”

As gloomy as it is, that was the bank’s base-case scenario and it “assumes the euro-area crisis will be contained.” It offered no analysis on what will happen if it isn’t.

Canada’s economy is currently feeling the impact of Europe, the U.S. and slower growth in emerging nations.

“Although Canadian growth rebounded in the third quarter (which ended Sept. 30) with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year,” the bank said.

It estimated Canada’s economy likely grew a modest 2.1 per cent this year — most of it in the first quarter — and will fare even worse at 1.9 per cent next year. Both numbers were 0.7 percentage points less than the bank had projected in July.

And a return to normal growth is a long way off, the bank added. Constrained by lower demand for exports, a high dollar, falling commodity prices, skittish markets and a more cautious consumer, it won’t be until the end of 2013 that the economy will return to full capacity, with an average growth rate of 2.9 per cent. That’s more than four years after the official end of the 2008-09 recession.

Given the under-utilization of the economy’s capacity and weakness abroad, the Bank of Canada was not particularly worried about inflation, despite last Friday’s report showing consumer prices rose 3.2 per cent in September, above the bank’s range, and that underlying inflation pressures continue to rise.

The bank said it expects consumer price increases will soon start slowing and bottom out at around one per cent next summer before trending upwards toward the bank’s two per cent target at the end of 2013.

That would suggest the bank might be thinking of cutting the overnight rate before raising it, but the bank suggested that isn’t likely either.

“With the target rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada,” it said.

The next scheduled Bank of Canada meeting is December 6th 2011.

Bank of Canada maintains overnight rate at 1 per cent

Date: September 7th, 2011

Ottawa, Ontario – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply. Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated. The Bank expects that American household spending will be even more subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions. Fiscal stimulus in the United States will also soon turn into material fiscal drag. Acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could prompt more severe dislocations in global financial markets. Resolution of these strains will require additional significant initiatives by European authorities. Growth in emerging-market economies has been robust, although its rate and composition will be affected by weakness in major advanced economies. While commodity prices have declined owing to diminished global growth prospects, they remain relatively high.

Largely due to temporary factors, Canadian economic growth stalled in the second quarter. The Bank continues to expect that growth will resume in the second half of this year, led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth. The supply and price of credit to businesses and households remain very stimulative. However, financial conditions in Canada have tightened somewhat and could tighten further in the event that global financial conditions continue to deteriorate. Net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar.

Slower global economic momentum will dampen domestic resource utilization and inflationary pressures. The Bank expects total CPI inflation to continue to moderate as temporary factors, such as significantly higher food and energy prices, unwind. Core inflation is expected to remain well-contained as labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

The next scheduled date for announcing the overnight rate target is 25 October 2011.