Bank of Canada drops rate guidance, lowers growth forecast
Posted on Oct 28, 2013 in Mortgage Market Updates and NewsGordon Isfeld
OTTAWA — There has been a sea change at the Bank of Canada.
No longer are policymakers setting a specific monetary course. For the first time in more than a year, they have dropped any reference to interest rates eventually rising.
'Surprisingly dovish': Economists react to Bank of Canada's statement
At the same time, they are also taking a less-rosy outlook for the economic climate, in Canada and globally.
What hasn’t changed, however, is the central bank’s biggest policy lever — its benchmark lending rate, which has remained at a near-record-low of 1% since September 2010 and which has been locked in by lower-than-anticipated inflation and lagging growth.
On Wednesday, those policymakers — now under the leadership of Stephen Poloz, who replaced Mark Carney in June — again kept that rate as is. They also downgraded growth estimates for Canada, despite some positive economic signs coming out of Europe and Asia, tempered by ongoing uncertainty over budget crises in the United States.
Canada’s economy is forecast to grow by 1.6% this year, down from the bank’s July outlook of 1.8%. For 2014, the estimate has fallen to 2.5% from 2.8% ahead of 3% in 2014, unchanged from July.
“The global economy is expected to expand modestly in 2013, although its near-term dynamic has changed and the composition of growth is now slightly less favourable for Canada,” the bank said in its quarterly Monetary Policy Report, released Wednesday along with its rate statement.
In Canada, uncertain global and domestic economic conditions are delaying the pickup in exports and business investment
“In Canada, uncertain global and domestic economic conditions are delaying the pickup in exports and business investment, leaving the level of economic activity lower than the bank had been expecting.”
FP1024_LendingRate_C_JRAs a result, the bank dropped any reference to future rate movements for the first time since April 2012. That forward guidance referred to ongoing slack in economic output, muted inflation and imbalances in household borrowing — all of which would need to be corrected before rates could begin to rise ‘over time.”
But still, the elephant in the room is Canada’s export market, which has so far been slower to move into other markets as the bank had envisioned. With the U.S. still our biggest trading partner, the continuing political turmoil over America’s spending and debt levels have dampened enthusiasm over increased shipments of goods to that country.
The Bank of Canada has lowered this year’s forecast for the U.S. to 1.5% from 1.7%, and cut next year’s outlook to 2.5%, from 3.1, while raising the projection for 2015 to 3.3% from the 3.2% mark in July’s MPR — on the hopes that fiscal concerns will have dissipated by then.
The weaker global picture has been somewhat tempered by stronger performances in Europe, Japan and China.
“The bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self-sustaining,” the bank said.
Importantly, policymakers now see Canada’s economic output gap — the difference between potential capacity and actual production levels — closing at the end of 2015, pushed back from the previous timeline of mid-2015.
Closure of the gap is expected to coincide with Canada’s inflation rate returning to 2%, which is the midway point of the bank’s 1-to-3% target. The overall consumer price index, as reported by Statistics Canada, was 1.1% in September.
But policymakers now appear less concerned about household debt, saying that while consumer spending “remains solid, slower growth of household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances.”
“Although the bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance.”
Even so, the bank said it “must also take into consideration the risk of exacerbating already-elevated household imbalances.”