Rate hikes may have to wait
Gloomy global events soften stance
OTTAWA – Bank of Canada policy-makers may find themselves backed into a corner by gloomy global events and opt next week to soften their tone on an eventual resumption of interest rate hikes.
No one expects the central bank to touch its trendsetting interest rate – at a near-record low of one per cent for nearly two years – but the wording of Tuesday’s statement that will accompany its decision is likely to be tweaked to reflect the impact of a worsening global economy.
“That’s what makes next week’s meeting interesting,” said Douglas Porter, deputy chief economist at BMO Capital Markets.
“Given almost every major central bank in the world ... has eased in some way, and that makes Canada look like a bit of an island talking about raising rates, even if they have no intention of doing it anytime soon.”
Many economists have already pushed back their forecasts for a hike to mid-2013.
No doubt, governor Mark Carney and his team will be mulling the economic data and could downwardly revise their outlook for the Canadian economy in the bank’s Monetary Policy Report, to be released Wednesday, one day after the rate decision.
“The recession in Europe, really, was not a surprise. A lacklustre U.S. economy is not really a surprise. What I think is a surprise is the extent to which China, India and Brazil have slowed and slowed rapidly,” Porter said.
“That’s been the biggest weight on commodity prices this year, which in turn of course has weighed on Canada’s performance.”
The outlook for the global economy dimmed again on Friday after China reported a slowdown in economic growth.
Gross domestic product rose by 7.6 per cent in the second quarter – still strong growth by most country’s standards, but approaching anemic for a global powerhouse like China.
“The number was the softest in over three years and provides more evidence that traction in the BRIC countries (Brazil, Russia, India and China) may not insulate the global economy the way they did during the last recession,” said CIBC World Markets economist Peter Buchanan.
Also Friday, a U.S. survey showed consumer confidence in that country weakened this month, with the University of Michigan’s closely watched index of sentiment falling to 72.0 from 73.2 in June.
“The confidence figures suggest that concerns over weaker job prospects continue to trump lower gasoline prices in determining sentiment,” said Andrew Grantham, at CIBC World Markets.
That disappointing data – along with easing by central banks in Europe, the U.K., China and South Korea – might have been disincentive enough, but “the domestic case for the Bank of Canada raising rates has melted away as well,” said Porter.
“The main argument for the Bank of Canada to raise interest rates would be to cool the housing market and consumer borrowing. These new mortgage rules will do that job,” said Porter.
Ottawa’s new rules for government-backed mortgage insurance, which took effect this month, shortened the amortization period, reduced the amount that can be borrowed against mortgages and limited insurance to homes valued at less than $1 million.