Bank of Canada delays rate hike
Bank of Canada governor Mark Carney. (Dave Thomas/QMI Agency)
OTTAWA - The Bank of Canada held its overnight interest rate at 1% on Wednesday but dramatically revised its projections to say any hike would be further away than previously thought, because of excess capacity, soft inflation and stabilizing household debt.
“While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2%inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated,” said the central bank, led by Mark Carney.
Carney has been the most hawkish central banker in the Group of Seven (G7) major industrial economies for several months but has steadily watered down his guidance on the need to start increasing rates. In October and December the bank said: “Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target.”
Set to become Bank of England governor in July, Carney was the first in the G7 to raise rates following the global financial crisis as the economy quickly recovered from a mild recession. But he has refrained from further tightening since mid-2010, the longest pause since the early 1950s, and began signaling last April the need to start hiking eventually.
Canadian primary securities dealers surveyed by Reuters last week unanimously expected the bank to hold rates and predicted a first hike in the fourth quarter of this year.
The bank now does not expect the economy to hit full capacity until the second half of 2014, not the end of 2013 as predicted in the October Monetary Policy Report, it said.
This is causing a substantially lower inflation profile. Total inflation is expected in the near term to remain around 1%, the bottom of the bank’s target range of 1 to 3%. For the first time since 2009, it projects inflation to below that band, in the first quarter. Total and core inflation should return to the 2% target in the second half of next year, not the end of this year as once thought.
In a clear signal that rate hikes are still on the table, the bank said its projections included a gradual reduction in monetary stimulus between now and the end of 2014.
The economy likely grew by only 1%, annualized, in the fourth quarter of last year versus initial expectations of 2.5% growth, it said.
It sees a weak start to 2013 with growth gathering momentum throughout the year as business investment and exports strengthen and temporary energy sector disruptions end. Annual 2013 growth should be 1.9% compared with the previous 2.2% forecast, it said.
The detailed new projections, released alongside the interest rate decision for the first time, were largely in line with market expectations of a weaker growth and inflation profile.
Dizzying household credit growth and a hot housing market had been a top concern of both Carney and Finance Minister Jim Flaherty but the bank’s language on Wednesday signaled the belief that this was getting under control.
The bank expects household credit growth to moderate further and the debt-to-income ratio to stabilize near current levels. It painted a mixed picture of the housing market itself, with residential investment seen declining from historically high levels but home building still higher than demographic demand.
“Ongoing strong rates of construction, particularly of multiple-unit dwellings in some regions, continue to point to overbuilding. Despite some softening in house prices, valuations in some segments of the housing market remain stretched,” it said.