Interests rates to stay low on cautious economic outlook

Canada’s situation improving, but Bank of Canada unlikely to raise rates before 2016

OTTAWA— The Bank of Canada says it sees solid signs that the global economy is picking up steam and will take Canada along for the ride, but still expects that it will take some time for this country to fully recover from the crippling effects of the recession.

Despite the rosier outlook, the bank has shaved first-quarter economic growth a full point lower than it previously thought to 1.5 per cent — mostly due to the severe winter weather — and for the year as a whole to 2.3 per cent from the previously projected 2.5 per cent.

The bank’s new monetary policy report on the outlook for the Canadian and global economies, issued Wednesday morning, won’t do much to alter that perception as it mostly expands on the previous analysis, which came out in January, with few significant alterations.

The differences lie in the margins — overall Bank of Canada governor Stephen Poloz and his deputies appear to be a little less worried about overly low inflation, too high house prices and household debt. They also seem more confident in the sustainability of the recovery, and that stronger U.S. demand and the lower Canadian dollar will start to benefit exporters, particularly manufacturers.

“In sum, the bank continues to see a gradual strengthening in the funda- mental drivers of growth and inflation in Canada,” the bank said in a statement. “This view hinges critically on the projected upturn in exports and investment.”

The most encouraging aspect of the report is what the bank’s governing council sees happening to exports, which remain about five per cent below pre-recession levels and are considered the economy’s weak link, not only keeping factories operating under capacity and job creation and salary growth muted, but also keeping businesses on the sidelines in terms of spending on needed investments to increase productivity.

Rising energy prices means oil and gas exporters will do even better than previously expected, the bank says. But it is also encouraged that manufacturers will soon see a lift, particularly now that the Canadian dollar has lost about 10 per cent of its previous value since February 2013.

The bank says it is still concerned about a downward shift in inflation, but for the present it expects the headline consumer price index will gravitate close to the 2.0 per cent target in the upcoming few months, although that is mostly due to the lower loonie and the effects of higher energy prices.

Core, or underlying, inflation will remain soft, however, and won’t return to target until 2016, the bank says. That’s a product of slack in the economy and growing competitiveness among retailers. If the bank is right about the analysis, it suggests interest rates won’t be raised until sometime in 2016.