6 Sep

BOC HOLDS STEADY ON INTEREST RATES – WARNS OF FUTURE HIKE

General

Posted by: Linda Colpitts

 

OTTAWA—Persistent economic malaise beyond Canada’s borders continues to force Bank of Canada Governor Mark Carney to postpone any increase in interest rates intended to head off a burst of consumer price inflation. The central bank kept its influential overnight rate at 1 per cent Wednesday.

The rate has remained unchanged since 2010 and, barring an unexpected shift in global trends, consumers and business borrowers can expect Carney to wait until next year to begin pushing up Canadians’ borrowing costs.

Painting a daunting picture of world conditions, the bank noted a “slowing of activity” in both advanced and emerging economies.

“The economic expansion in the United States continues at a gradual pace. Europe is in recession and its crisis, while contained, remains acute,” Carney’s statement said.

“In China and other major emerging economies, growth is decelerating somewhat more quickly than expected from previously-rapid rates, reflecting past policy tightening, weaker external demand, and the challenges of rebalancing towards domestic sources of growth.”

Analysts pointed out that Carney is dealing with a knife-edge international situation with the potential to drag down countries everywhere if policymakers are unable to head off further economic shocks.

“Risks abound,” said TD Bank senior economist Jacques Marcil. “The euro zone is approaching important deadlines as it muddles through its financial crisis, the U.S. economy remains fragile, emerging markets are still slowing down and the possibility of an oil shock involving Iran has recently increased.”

Domestically, the Bank of Canada said the economy is being slowed by global conditions but will expand in 2013. Carney is sticking with his forecast of Canadian economic expansion of 2.1 per cent this year, 2.3 per cent in 2013 and a fairly robust 2.5 per cent in 2014.

Inflation, which has been lower than expected in recent months, will return to the central bank’s target of 2 per cent over the next year as Canada’s economy near its production potential, Carney said.

He continued to provide a cautious reminder that the current historically low interest rates will have to rise at some point in the future. “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, consistent with achieving the 2 per cent inflation target over the medium term,” the bank said. But, it added, “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

Assessing Carney’s comment, RBC Chief Economist Craig Wright said, “I think that he’s just keeping people aware that rates right now are closer to emergency settings than a normal level and, if you are borrowing, you want to keep in mind that rates will eventually go higher.”

Carney, who made headlines by accusing corporate executives of sitting on large profits rather than re-investing them, went out of his way to stress that business investment “remains solid” and, along with consumer spending, will be a main driver of economic growth in the months ahead.

Also, the bank said “there are tentative signs of slowing in household spending, although the household debt burden continues to rise.”

The next scheduled date for announcing the overnight rate target is Oct. 23.

 

warns-of-future-hike