Interest rates going nowhere fast: BMO
But Bank of Canada sticks with wording on eventual increase
OTTAWA – The Bank of Canada acknowledged Tuesday that the weakening global economy is slowing growth in this country more than previously thought, but it still expects moderate growth.
To no one’s surprise, the central bank held its key interest rate at a near-historic low of one per cent, where it has been since September 2010. What was surprising, however, was the wording of the bottom line in Tuesday’s statement, which stuck to the bank’s June script.
Bank governor Mark Carney and his policy advisers reiterated “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.”
Many economists had expected the bank to tone down the language somewhat, given the deteriorating global outlook, with the bank possibly hinting at a longer threshold before borrowing costs will begin rising – or perhaps holding out the possibility of lowering rates if things don’t improve soon.
Douglas Porter, deputy chief economist at BMO Capital Markets, said: “We suspect the bank is going precisely nowhere with interest rates over the next year, as has been the case for almost the past two years.”
“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. After all, in the current global economic climate, restraint is the better part of valour.”
In its statement, the Bank of Canada said while economic growth in United States “continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction.”
“In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand,” the Bank of Canada said.
Although “global headwinds” are straining economic activity in this country, policy-makers said “domestic factors are expected to support moderate growth in Canada.”
The Bank of Canada lowered its outlook for the economy, saying growth will be limited to 2.1 per cent this year and 2.3 per cent in 2013. That’s down from its previous forecast of 2.4 per cent growth in both years.
It also said the economy is expected to reach full capacity in the second half of 2013.
“Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions” the bank said, but added “the slowdown in global activity has led to a sizable reduction in commodity prices, although they remain elevated.”
On Monday, the International Monetary Fund issued a warning that the global economy is stumbling as the European crisis drags on and that the impact is spreading to emerging markets, as well as major economies.
Still, the IMF agreed that Canada will hold on to some of its growth potential, al- though not as strong as Tuesday revised forecasts from the Bank of Canada. The global lending body adjusted its outlook to 2.1 per cent for 2012, up from two per cent in the fund’s April estimate. Growth in 2013 was unchanged at 2.2 per cent.
The IMF said the 17-nation eurozone will decline 0.3 per cent this year and increase 0.7 per cent in 2013, while the U.S is expected to grow two per cent and 2.3 per cent in 2012 and 2013, respectively.
Carney will elaborate on the bank’s economic outlook on Wednesday when it releases its quarterly monetary policy report.
Also on Tuesday and Wednesday, Federal Reserve chairman ben bernanke goes before the U.S. Senate banking committee. It is unlikely he will raise the possibility of another round of quantitative easing at this time, but his comments will be closely watched for the Fed’s insight on the condition of the U.S. economy.