Bank of Canada leaves rate unchanged
Mark Blinch/Reuters
Bank of Canada Governor Mark Carney poses for a portrait in Toronto.
Paul Vieira, Financial Post · Tuesday, Oct. 19, 2010
The Bank of Canada did what markets expected Tuesday and kept its key policy rate unchanged at 1%, citing weaker-than-projected growth — especially in the United States — and noting the risk that “heightened tensions” in currency markets pose to the global recovery.
In its statement explaining its decision, the central bank said it scaled back its growth projections for this country as the global recovery enters a “new phase.” It now expects GDP to expand just 3% this year and 2.3% in 2011, compared to expectations in July for advances of 3.5% and 2.9%, respectively. Second-quarter GDP growth, at 2% annualized, was well below the central bank’s forecast of 3% expansion.
Plus, the Bank of Canada does not envisage the Canadian economy to reach full potential until the end of 2012, which is one year later than previously expected. Inflation -- which guides all interest-rate decisions -- won’t reach the critical 2% level until the end of 2012, the statement added, due to “significant” excess slack in the economy.
The decision to leave its key rate unchanged leaves “considerable monetary stimulus” in place to achieve the central bank’s preferred 2% target, it indicated. Previously, when the bank raised its rate in September, it said financial conditions were “exceptionally stimulative.”
“The economic outlook for Canada has changed,” said the central bank, led by governor Mark Carney. “[A] more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending” as real-estate activity slows and consumers deal with their personal debt.
“At this time of transition in the global economy, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption … any further reduction in monetary policy stimulus would need to be carefully considered,” the central bank said. Its next decision on interest rates is scheduled for Dec. 7.
Tuesday’s rate statement reflects a more dovish tone from the central bank compared to its last decision roughly six weeks ago, when it opted to raise its benchmark interest rate by 25 basis points for a third consecutive time. More detail regarding the central bank’s outlook will emerge Wednesday when the Bank of Canada releases its latest quarterly economic outlook.
The big game-changer, analysts say, is the tepid U.S. economy and the signals from the Federal Reserve that it’s preparing to inject additional liquidity in the economy through asset purchases, with a dual goal of lowering borrowing costs and boosting inflation expectations.
As a result, a pause from the Bank of Canada “is entirely justifiable,” said Eric Lascelles, chief Canadian strategist at TD Securities, in a note to clients prior to the release of the central bank’s decision. “The thought that if the U.S. needs [further easing], the economic prospects for the U.S., and by extension Canada, are also threatened.”
The Bank of Canada said the global economic recovery is entering a “new phase,” as the factors supporting growth in advanced economies, such as the rebuilding of inventories and pent-up demand, subside just as fiscal stimulus is wound down.
“The combination of difficult labour market dynamics and ongoing deleveraging … is expected to moderate the pace of growth relative to prior expectations,” the central bank said. “These factors will contribute to a weaker-than-projected recovery in the United States in particular.”
Growth in emerging economies is expected to ease as governments in those markets put the brakes on stimulus spending and raise borrowing costs. As it happened, China raised interest rates Tuesday morning.
And recent moves by emerging markets and advanced economies to intervene in foreign-exchange markets was highlighted by the Bank of Canada as a further risk to the global economic recovery. “Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” the central bank said.
The warning emerges just days before a key Group of 20 meeting of finance ministers and central bankers in South Korea in which foreign-exchange policies is now expected to dominate the agenda. Both Mr. Carney and Finance Minister Jim Flaherty are set to attend the meeting.
Financial Post
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