OTTAWA — While the Bank of Canada acknowledges the economic outlook here and elsewhere “is slightly weaker” than thought, policymakers are also offering up some hope for the near future.
In a nutshell, Canada’s economy is growing at a slower pace than expected — although a pickup is likely later this year —and inflation remains weak at near recession levels, for now, while consumer debt and the housing market appear to be stabilizing, if not cooling. At the same time, the global outlook has also slowed, while fiscal and debt concerns in the United States and Europe have dissipated slightly.
The bottom line for Canada: Interest rates aren’t going anywhere soon.
On Wednesday, for the first time, policymakers combined their regular-rate decision announcement with the bank’s Monetary Policy Report, a closely-watched quarterly reading on domestic and global factors affecting the economy.
As expected, the Bank of Canada kept a lid on borrowing costs, with its trendsetting overnight rate — the main instrument used to guide inflation toward the bank’s 2% target — remaining at a near-record low 1%, unchanged since September 2010 and now the longest dormant stretch since the early 1950s.
The only wrinkle in its usually pact statement accompanying a rate announcement was to highlight “the more muted inflation outlook and the beginning of a more constructive evolution of imbalances in the household sector,” adding that “the timing of any such withdrawal is less imminent than previously anticipated.”
That represent presents a slightly more dovish view of current monetary policy than previously. Given the still-hesitant outlook for Canada and other countries, most forecasters now see little chance the bank can begin raising rates again until late this year or early 2014.
By the numbers, the Bank of Canada on Wednesday pegged global economic growth slowed in 2012 to 3% from 3.9% the previous year. In 2013, that growth will slow to 2.9%, before picking up next year at a rate of 3.5%.
For Canada, growth will be limited to about 2% this year, down from the bank’s October forecast of 2.4%, following estimated growth of 1.9% in 2012, which is below the previous outlook of 2.3%. The bank is calling for a 2.7% advance in 2014, with full economic capacity kicking in in the second half of next year, later than previously thought.
“External demand for Canada’s manufacturing exports remain quite modest relative to its pre-recession level, largely because of the still-low level of activity in the U.S. housing sector,” the bank said.
As for the U.S. economy overall, the bank’s outlook is for growth of 2.1% this year and 3.1% in 2014. “The economic expansion in the United States is continuing at a gradual pace, restrained by ongoing public and private deleveraging, global weakness and uncertainty related to fiscal negotiations.”
The eurozone will likely remain in negative growth this year, down 0.3%, after a contraction of 0.4% in 2012. However, the currency region is forecast to post a positive performance in 2014, with growth of 0.8%
“The economic expansion in the United States is continuing at a gradual pace, restrained by ongoing public and private deleveraging, global weakness and, more recently, by uncertainty related to fiscal negotiations,” the bank said.
“Europe remains in recession, and recent indicators point to a somewhat more protracted downturn than expected in October,” it said. “While growth in China is improving, economic activity has been slowing further in some other major emerging economies.
Still, those estimates assume the eurozone debt crisis “will remain contained and that a severe tightening of U.S. fiscal policy will be avoided,” the bank said. “Overall, recent developments support these assumptions.”
Also in its report, the bank said near-historic low lending rates has slowed the growth in household credit to 5.5% last year to slightly more than 3% in the first quarter of 2013.
“This is the lowest rate of growth since 1999, and reflects a slowdown in the growth of both residential mortgage and consumer credit,” it said. “Even with the recent slowing, household credit still grew slightly faster than disposable income in the third quarter.”
The latest reading by the bank puts the ratio of household debt to income at 165%.
Bank of Canada governor Mark Carney — who steps down on June 1 to take the top position at the Bank of England — will hold a news conference later on Wednesday to provide more insight into the bank’s most recent domestic and global outlooks.
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