Bank of Canada holds Rate Steady

 In Real Estate Market News

The Bank of Canada left its main interest rate untouched at 1 per cent Tuesday and again suggested that it will tighten borrowing costs when economic conditions allow such a move, while hinting this is farther off than policy makers were anticipating just six weeks ago.

 

The decision to stand pat for a 14th consecutive meeting, extending the central bank’s longest pause since the 1950s, was expected. But it comes against the backdrop of a European crisis that has worsened measurably in recent days, prompting an emergency conference call this morning of central bankers and finance ministers from the Group of Seven rich economies.

 

At their last decision in April, Bank of Canada Governor Mark Carney and his colleagues took a semi-hawkish turn, upgrading their outlook for the domestic and global economies, reiterating their warnings about household debt, and declaring that rate hikes might soon “become appropriate,” depending on how things play out. On Tuesday, the central bank did not come full circle and start hinting that a rate cut might come into play due to the deteriorating global climate, as markets have now come to expect. However, policy makers sounded a cautious tone.

 

“The outlook for global growth has weakened in recent weeks,” Mr. Carney and his rate-setting panel said in Ottawa. “Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in financial conditions.”

 

The central bank seemed relatively unfazed by signs that the rebound in the United States — Canada’s main export market — is faltering (in large part because of Europe’s troubles), saying only that the world’s biggest economy “continues to expand at a modest pace.” Emerging markets, though, are “slowing a bit faster and a bit more broadly than had been expected, the bank noted, and “modest global momentum and heightened financial risk aversion” have lowered commodity prices, as Canadian producers know all too well.

 

And the central bank tweaked a key sentence in its statement in a manner that suggests it is at least a bit less confident in Canada’s ability to chug along, while not totally backing away from the notion that its next move, whenever that is, will be an increase rather than a reduction in rates.

 

“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,” the central bank said. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

 

That language was almost identical to the April statement except then, it began with, “In light of the reduced slack in the economy and firmer underlying inflation.”

 

On Wednesday, the central bank did not say if recent events have changed its projection for the remaining spare capacity in the economy to be fully absorbed in the first half of next year. Instead, policy makers said there is a “small degree of excess capacity” in the economy. Also, they said inflation will fall below their 2-per cent target in the near term due to lower gasoline prices, and a measure of price gains that strips out energy and other volatile goods will stay around that level.

 

All of which suggests that rate hikes are still on the table when and if they’re do-able, but that there’s little need to rush.

 

Mr. Carney and his team acknowledged that Canada’s economic growth in the first three months of the year — which came in at a 1.9-per cent annual pace, well off of the central bank’s 2.5-per cent estimate — was slower than expected. Still, they said “underlying economic momentum appears largely consistent with expectations” and called domestic financial conditions “very stimulative.”At the same time, even as they noted business and household confidence has “held up” despite troubles swirling around the world, the central bankers warned that the composition of growth in Canada is still too tilted towards housing and consumer spending, neither of which is viewed as a sustainable driver.“Housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth,” the central bank said. Also, it added, government spending is expected to be “quite modest” as Ottawa and the provinces retrench, and exports will be hampered not just by “ongoing competitiveness challenges” like the high Canadian dollar, but also by “modest external demand.”

 

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