Five Things to Watch for In The Bank of Canada’s Rate Decision
When the Bank of Canada announces its interest rate decision Tuesday, it will do so with the Canadian economy at its most sluggish level this year.
Last week’s GDP data from Statistics Canada showed the Canadian economy expanded at an annual rate of 0.6% in the third quarter, far lower than the second quarter’s 1.7% and well below the Bank of Canada’s 1% forecast.
That economic weakness raises questions about the bank’s hawkish tone that has prevailed for most of 2013. Governor Mark Carney and his team originally introduced the language back in April, when the bank announced that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
The surprise move toward a tightening bias made the Bank of Canada an outlier in the developed world, where most central banks appear no where close to raising rates.
Could a weak economy, however, cause the bank to retreat from some of its hawkish language? Below, we outline five things to watch for in the Bank of Canada’s Tuesday announcement that could signal a shift in attitude.
The GDP numbers show an economy experiencing anemic growth, and the Bank of Canada will have to acknowledge as much on Tuesday.
“We expect that the Bank of Canada … will note disappointment with the subpar pace of Canadian growth in the third quarter, and continue to expect paltry readings near term,” said Dana Peterson, economist and director at Citi Investment Research. “These factors will underpin the need for keeping rates fixed at low levels for some time.”
Also important will be the bank’s comments on Canada’s housing market and consumer debt. Low interest rates have exacerbated Canada’s high debt loads and red hot housing market, and the bank has said that household debt levels will now be an important factor in determining when rates will be hiked.
Michael Gregory, senior economist at BMO Capital Markets, notes the Bank of Canada may decide to comment on the U.S. fiscal cliff this time around — something it did not do in its October announcement.
The fiscal cliff refers to a series of tax increases and spending cuts that will come into effect in the United States in the new year. Global markets have been volatile recently in response to the fiscal cliff negotiations currently under way in Congress.
A resolution will be critical, because economists agree that the massive level of government spending cuts, combined with tax hikes on consumers, will conspire to seriously harm the U.S. economy.
It will be interesting to see how the Bank of Canada interprets the mixed signals coming from the global economy.
The latest manufacturing data has shown that China’s economy appears to be stabilizing, helping to alleviate fears about a hard landing. On the flip side, similar data from the eurozone show that economies there continue to weaken, while U.S. manufacturing data appear stagnant.
In its Oct. 23 announcement, the Bank of Canada noted the loonie was being influenced by “safe haven flows and spillovers from global monetary policy.”
Of course, since then, the Canadian dollar has essentially remained flat. While the bank has made it clear that it views any efforts to intervene and influence the value of the loonie as futile, it’s nevertheless important to pay attention to the bank’s view on Canada’s currency.
The Bank of Canada currently expects the output gap, or the level of “slack” in the economy, to be closed at the end of 2013.
But Krishen Rangasamy, senior economist at National Bank Financial, notes the recent spate of weak economic data means that, realistically, the output gap does not look like it will close until the end of 2014 at the earliest — and potentially could drag on longer.
“Given the now lower starting point, even assuming the economy grows exactly as the Bank of Canada estimated in its October Monetary Policy Report … the output gap won’t close until end-2014,” he said.
Mr. Rangasamy said the bank’s fourth quarter GDP target of 2.5% is looking optimistic, however, given September’s weak handoff into the current quarter. He expects growth will actually be closer to 1.2% — meaning the output gap wouldn’t close until 2015.