Bank of Canada cuts outlook

Bank of Canada buildings in Ottawa, June 21, 2012. (CHRIS ROUSSAKIS/QMI Agency)

Bank of Canada buildings in Ottawa, June 21, 2012. (CHRIS ROUSSAKIS/QMI Agency)

RANDALL PALMER and LOUISE EGAN, Reuters

, Last Updated: 12:55 PM ET

OTTAWA - The Bank of Canada left interest rates unchanged on Tuesday, but made clear it was still weighing an eventual move higher, even as other central banks ease monetary policy to cope with damaging economic slowdowns.

The bank repeated mildly hawkish interest rate language it used in June, surprising many economists who thought it would dilute or possibly even eliminate talk of possible higher rates because of slower growth and worse global prospects.

But the rest of the statement was peppered with more downbeat economic predictions that suggested any rate hike would be a good ways down the road.

“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,” it said, as it kept its main policy rate at 1 percent.

While the bank made clear it is looking to tighten policy, it lowered growth forecasts for this year and next. It said the economy will not reach full capacity till the second half of 2013, not the first half as it had thought in April.

TD Securities chief Canada macro strategist David Tulk said the bank now seemed completely on hold, though with a bias to take rates higher at some point.

“They’re really trying to send a message to the market that pricing in cuts is an unwise suggestion,” said Tulk.

Though analysts polled by Reuters on July 11 unanimously forecast the central bank’s next move would be up, overnight index swaps — even after Tuesday’s decision — point to the next move being down.

The median forecast in the Reuters poll was for a rate hike in the second quarter of 2013.

“We can’t rule out the bank going earlier than we think but a whole lot has to go right for the bank to actually raise interest rates,” said BMO Capital Markets deputy chief economist Douglas Porter.

“And frankly, given all the global risks out there, I have a hard time believing the bank is going to be raising interest rates before the middle part of next year.”

In contrast to the Canadian statement, U.S. Federal Reserve Chairman Ben Bernanke said shortly afterward that the Fed stood ready to offer additional monetary support.

The Bank of Canada was the first in the Group of Seven leading industrialized nations to raise rates after the last recession as the economy recovered, and it remains the only G7 central bank with a tightening bias.

The bank sees growth at 2.1 percent in 2012, 2.3 percent in 2013 and 2.5 percent in 2014.

This is above the 2 percent rate that it sees as the economy’s long-term capacity to grow without triggering higher inflation, once all the slack has been used up.

In April it foresaw 2.4 percent growth in 2012-13 and 2.2 percent in 2014.

For the first time, the bank said overall inflation would remain “noticeably below” its 2 percent target over the coming year before returning to target in mid-2013, partly because of cheaper gasoline. It previously said inflation was expected to fall below 2 percent in the short term.

Core inflation should stay around 2 percent, it said.

The Bank of Canada said global headwinds were restraining growth in Canada, but it expected domestic factors to support moderate growth.

Consumption and business investment will be the main drivers of growth, it said.

At least one pressure point on the bank is lessening, the risk of ever-increasing household indebtedness concomitant with a housing boom. The government has tightened mortgage rules, and Tuesday’s statement said housing activity was expected to slow from record levels.


Videos

Photos