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.
