OTTAWA — The
Globe and Mail
Published Wednesday,
Oct. 23 2013, 10:02 AM EDT
The Bank of Canada
has abruptly abandoned an explicit warning that its key interest rate is headed
higher in the face of a much gloomier economic outlook.
Cautioning that
Canada is likely to grow much more slowly than it thought in the summer, the
central bank now acknowledges that its next move is just as likely to be a rate
cut, as an increase.
The surprise
decision Wednesday to drop its so-called tightening bias – in place since April
2012 – coincides with a significant downgrade of the bank’s forecast for GDP
growth in Canada.
The bank is cutting
its forecast for both the Canadian and U.S. economies – not just for this year,
but for 2014 and 2015 as well.
The bank pointed to
an economic environment that is now “less favourable for Canada” – most
notably, the painfully slow recovery from recession in the United States,
Canada’s main trading partner.
“Uncertain global
and domestic economic conditions are delaying the pick-up in exports and
business investment, leaving the level of economic activity lower than the bank
had been expecting,” the Bank of Canada said in a statement.
For the moment,
Canada’s export problem is that it is still far too dependent on the U.S.,
which is grappling with a sluggish recovery and poisoned budget politics in
Washington.
The bank left its
overnight interest rate unchanged at the one per cent, where it’s now been
since September 2010. The bank’s next rate-setting decision is Dec. 4.
Many economists now
don’t expect a Bank of Canada rate hike until late 2015, or even 2016.
The Bank of Canada
has been anticipating that exports and business investment would pick as the
consumer-driven domestic economy cooled, along with the housing market.
But that isn’t
happening. Business confidence remains weak and exports are still weak, failing
to regain pre-recession levels.
That means the
economy isn’t likely to return to “full production capacity” until the end of
2015, according to the bank, or six years after the recession ended. The bank
had previously estimated that the so-called output gap would close in mid-2015.
The bank slashed its
closely watched forecast of annual GDP growth in Canada to 1.6 per cent this
year, down from the 1.8 per cent it forecast in July, and to 2.3 per cent in
2014, down from its earlier forecast of 2.7 per cent. In 2015, it expects
growth of 2.6 per cent, versus 2.7 per cent previously.
The bank also said
it expects the U.S. economy will grow just 1.5 per cent this year and 2.5 per
cent in 2014. That’s down from its earlier forecasts of 1.7 per cent and 3.1
per cent respectively.
Bank of Canada
deputy governor Tiff Macklem previewed the GDP downgrade in an Oct. 1 speech in
which he highlighted the country’s declining share of global trade.
Dating back to April
of last year, former Bank of Canada Mark Carney and his successor Stephen Poloz
have insisted the bank would raise the overnight rate to a more normal level
“over time.”
That important
caveat has now been stricken from the bank’s statement.
“The fact that
inflation has been persistently below target means that the downside risks to
inflation assume increasing importance,” the bank said Wednesday.
Inflation has been
consistently below the bank’s 2 per cent target since early 2012.
Beyond the U.S. and
Canada, the economy is generally doing better than expected. In its statement,
the bank said the nascent European recovery, “while modest, has surprised to
the upside.” And China’s economy is showing “renewed momentum,” the bank said.
And the Japanese economy is also doing better.
At home, the bank
said consumer spending is holding up better than expected and remains “solid.”
The Bank of Canada also continues to expect a “gradual unwinding of household
imbalances.”
Many economists have
fretted about Canadians’ soaring level of debt to income as low interest rates
spurred a long housing price boom in much of the country. Higher mortgage rates
could put many homeowners under pressure. But it’s the export sector that really
worries the bank.
In its quarterly
monetary policy report, also released Wednesday, the bank said the export
sector has been “lackluster” in the second and third quarter, with the
exception of autos and forest products.
“The recent weakness
in exports is indicative of a broader trend of slower-than-expected export
growth that began in early 2012,” the bank. It said this is due to “shifts in
trade linkages” and ongoing competitive challenges.”
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