CLOSE CALL ON RATE CUT
In the end, BoC holds firm
The head of Canada’s central bank acknowledged that policy-makers came close to the tipping point on Wednesday’s interest rate decision.
In the end, they chose not to lower the key lending level because the “balance of risks” was still tilted toward uncertainty in the economy.
But how close was the decision? Pretty darn close, it would seem.
“Given the downgrade to our outlook, (the) governing council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity,” Bank of Canada governor Stephen Poloz told reporters. “However, we identified a number of significant uncertainties in the current context that are serving to widen the zone of balance within our risk-management framework.”
These include uncertainty over the impact of new and tighter mortgage rules, implemented by the federal government on Monday, and driven primarily by concerns over soaring home prices in Vancouver and Toronto, and surrounding municipalities.
“Importantly, the government’s actions to mitigate risks in the mortgage market were not seen as an impediment to easier monetary policy,” Poloz said.
“Indeed, a combination of lower interest rates and more stringent macro-prudential policy would likely work to reduce both financial stability risks and the risk of an undershoot of inflation at the same time,” the governor added. “This is because interest rate changes have their largest effect on inflation risk, while stronger macro-prudential settings will lead to a higher quality of household indebtedness over time.”
The decision to hold the trendsetting overnight lending rate at 0.5 per cent — unchanged since July 2015 — came as annual growth appeared stuck at 1.1 per cent this year, down from the previous estimate of 1.3 per cent, according to the bank’s Monetary Policy Report, a quarterly publication of forecasts on the domestic and global economies, released Wednesday along with the rate decision.
The MPR, which updates previous forecasts contained in the July document, still calls for a pickup in growth over the next two years — although at a slightly slower pace than earlier hoped — by which time the economy should be running at full capacity.
The bank anticipates gross domestic product of two per cent in 2017, down from the July estimate of 2.2 per cent, while the 2018 estimate was left at 2.1 per cent.
Household spending remains an overarching concern for policymakers.
“The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment, while dampening household vulnerabilities,” the bank said.
However, many private-sector economists are taking a wait-andsee approach to the new rules, given concerns that new restrictions in the two hottest housing markets could cause purchasers to look beyond the city centres and result in price pressures in the surrounding communities.
Even so, policy-makers believe the tighter housing measures “should mitigate risks to the financial system over time.”
Also clouding the outlook is Canada’s below-par export activity — a hangover from the 2008-09 recession — and the central bank expects companies to experience weaker export growth in 2017 and 2018 as demand, both globally and in the United States, eases and businesses in this country experience “ongoing competitive challenge,” the bank said.
“Recent export data are improving but are not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar’s past depreciation.”
The better news is the bank’s view that investment in the energy sector “appears to be bottoming out” as non-resource-based sectors — such as services industries — are “growing solidly,” according to policy-makers.