OTTAWA – The Bank of Canada says it will likely have to keep interest rates low for longer than it expected in the face of a surprisingly weak economy.
The central bank says in its latest analysis that the economy continues to depend on monetary stimulus, so has decided to keep the trendsetting policy rate at one per cent.
That was widely expected, but in a mild surprise, the bank went further in issuing a new advisory to Canadians and financial markets that the anticipated need to raise rates in the future is now less imminent.
The change in the guidance from last month likely means the central bank won’t move to tighten borrowing costs until 2014 or until it has more compelling evidence the Canadian economy is ready to re-engage.
In a bit of mea culpa, the bank’s policy setting team says it significantly underestimated the weakness of the economy in the second half of 2012, saying the damage has served to increase excess capacity.
As a result, it has shaved three-tenths of a point off its projections for growth for both 2012 and 2013, to 1.9 per cent and 2.0 per cent respectively.
The bank still has faith the economy will return to strength, however, and believes the turnaround will begin this year and pick up speed in 2014, when growth will average 2.7 per cent.
The bank also believes there are fewer imminent risks facing the global and Canadian economies, although the speed of the slowdown in Canada’s previously hot housing market could become a new challenge.
If there were to be a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, it says.