OTTAWA – Low borrowing costs will remain for awhile longer after The Bank of Canada moved Tuesday to keep interest rates low, noting the economic recovery is being blown slightly off course by a perfect storm of global turbulence that is affecting all major economies.
But in a statement that was not as dovish as some anticipated, the central bank gave no comfort to those looking for the next move to be an interest rate cut, rather than an increase.
As expected, the central bank kept its benchmark policy setting at one per cent until at least the next policy meeting in September, but tellingly also maintained its bias toward tightening monetary policy in the future.
The forward-looking bias is a bit of a surprise given that the bank ratcheted down its forecast for the economy from the relatively rosy 2.4 per cent growth rate in 2012 and 2013 to 2.1 per cent and 2.3 per cent for the two years, respectively.
More aggressive expansion now won’t come until 2014 when the economy is forecast to grow by 2.5 per cent.
And the economy won’t return to full capacity until the second half of 2013, about six months later than the bank monetary policy panel, which is led by governor Mark Carney, thought in April.
Still on future policy action, it repeated the mantra of April.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
CIBC chief economist Avery Shenfeld said that was a slap in the face to markets, which had been looking for a more dovish signal from Carney.
“The market is now pricing in a rate cut as the next move by the Bank of Canada, and Carney’s team is saying that’s unlikely,” he said.
“(The bank) is delaying a resumption of the kind of growth rates needed to get us back to full employment, but not giving up on the idea that that is coming in a year or so. This forecast could easily involve a rate hike early in 2013, but that’s going to depend very much, as the bank knows, on what policy-makers in the U.S. and Europe actually do.”
The new projections put the central bank closer in line with the private sector economist consensus and virtually on the same page as the International Monetary Fund’s call on Monday for 2.1 per cent and 2.2 per cent growth in 2012 and 2013.
“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,” Carney and his policy panel said in statement.
“Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions (interest rates).”
However, they note that the global slowdown is restraining exports and pushing down commodity prices, sapping Canadian incomes and wealth. Meanwhile, record-high household debt is restraining spending, housing activity is expected to slow from record levels, and governments have taken themselves out of the stimulus game with austerity budgets.
The interest rate announcement was pretty much anticipated by private sector economists. It now means the bank will have kept the benchmark setting at one per cent two full years, and if analysts are correct, it probably will do so for a third.
“The maintenance of the tightening bias is likely a signal to one and all that the bank has absolutely no intention of following the easing lead of many other central banks, but at the same time they are highly unlikely to act on that bias anytime soon,” said Doug Porter of the Bank of Montreal.
“After all, in the current global economic climate, restraint is the better part of valour.”
Across the board, the bank says, conditions are worse than they were a few short months ago.
The United States recovery continues but it is weaker, it noted.
In Washington on Tuesday, Federal Reserve chairman Ben Bernanke said the Fed is prepared to take further action to support the economy, but didn’t spell out how or when.
In China and other emerging economies, the deceleration of growth has been greater. Developments in Europe now point to a renewed contraction.
“This slowdown in global activity has led to a sizable reduction in commodity prices,” which hits Canada’s resource sector, particularly oil exports, the bank said.
“Global financial conditions have also deteriorated since April, with periods of considerable volatility,” it adds.
Finally it issues a warning: “The bank’s base-case projection assumes that the European crisis will continue to be contained, although this assumption is subject to downside risks.”
The bank does not say what will happen if Europe’s debt crisis leads to a financial system collapse, as happened in the fall of 2008, but the IMF on Monday pronounced such an outcome as catastrophic and capable of sending the global economy back into recession.
The Bank of Canada will spell out more fully its view of the global and Canadian outlook on Wednesday, when it releases the quarterly monetary policy review.