Central bank keeps interest rate at 1%
Household debt remains a serious issue, Carney says
OTTAWA – The Bank of Canada has kept its trendsetting policy interest rate at one per cent for the 17th consecutive time, but signalled Tuesday that it’s worried about household debt and may need to hike rates if the problem worsens.
The stand-pat decision on the policy rate was widely expected, but economists had been looking for softer language on the warning that the next move will be to hike interest rates.
Bank governor Mark Carney kept the previous language largely intact and the bank’s statement on the economy wasn’t as subdued as some had expected.
That’s the way markets interpreted the statement. The dollar, which had been sagging before the 9 a.m. release date, rose modestly afterwards.
CIBC chief economist Avery Shenfeld said Carney had softened somewhat his tightening bias based on economic growth, but introduced a new reason for hiking rates — his growing alarm with mounting household debt.
“In the end, the (language) is still consistent with a central bank who believes he is going to raise rates some time in mid-2013 or early in the second half of 2013, but whether that happens could still be very sensitive to the growth rate in the economy,” Shenfeld said.
The statement makes clear that Carney has no plans to cut interest rates, he added.
The bank said household debt, which was recently revised to 163 per cent of income by Statistics Canada, will continue to rise before stabilizing in a few years.
It said it will consider those imbalances in the housing sector in its future monetary decisions, something it did not mention in previous reports but a concern Carney included in his speech in British Columbia last week.
In that speech, Carney notably dropped his mantra about needing to raise interest rates to the extent that economic recovery continues, leading many economists and markets to believe he would move to a neutral bias in Tuesday’s announcement.
That didn’t happen, although Carney dropped in vague language that tightening will likely come “over time.”
Still some economists did see the overall statement as slightly more dovish than the previous advisories, in part because the Bank of Canada had downgraded its expectations for inflation.
“The Bank of Canada has taken a baby step toward joining the dovish tone across other global central banks and I can see further steps ahead,” said Derek Holt, vice-president of economics with Scotia Capital.
The bank was also somewhat more upbeat about the Canadian and global economy than analysts anticipated. Many economists considered the bank’s projection for 2.1 per cent growth this year, 2.3 in 2013 and 2.5 in 2014 too optimistic, particularly as the first half of this year had come in below two per cent.
But Carney stuck to his guns. He upgraded this year’s forecast to 2.2 per cent — a technical correction due to changed methodology recently adopted by Statistics Canada — kept 2013 unchanged and lowered 2014 a smidgen to 2.4 per cent.
“Following the recent period of below-potential growth, the economy is expected to pick up and return to full capacity by the end of 2013,” the bank said.
“The bank continues to project that the expansion will be driven mainly by growth in consumption and business investment,” but that housing activity will slow and exports are expected to remain below pre-recession levels until the first half of 2014.
On the global economy, he said conditions are largely what had been expected with U.S. expansion progressing “at a gradual pace” and Europe in contraction.
But he said there were signs the larger than expected slowing in China and other emerging economies was stabilizing, prices for oil and other commodities have increased, and global financial conditions have improved due to aggressive policy actions.
The outlook is overall somewhat brighter than what many private sector economists perceive.
Carney will provide a more detailed explanation on Wednesday for why he thinks conditions are relatively rosy when he releases the bank’s monetary policy review and holds a news conference on the subject in Ottawa.