 Mike Toporowsky AMP
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| Bank of Canada Rate Holds Steady |
Tuesday, March 2, 2010 |
Bank of Canada Rate holds steady
OTTAWA -- The Bank of Canada reiterated on Tuesday its conditional pledge to keep its key-lending rate at a record low until July, but modified its view on inflation by indicating the risks to its outlook are "roughly balanced" as opposed to tilted to the downside.
That was the one significant change in its scheduled interest-rate announcement, and analysts might interpret this as a first step by the central bank to ready markets for an interest-rate hike.
For nearly a year, the central bank has pledged to keep its benchmark rate at 0.25 per cent until July in an effort to pump up economic growth, on the condition that inflation would not hit its preferred two per cent target until mid-2011. The central bank's mandate is to set its key policy rate at a level to achieve two per cent inflation.
In previous statements, the central bank had suggested inflation risks were titled downward because of the possible need to engage in quantitative easing, in which the Bank of Canada would flood financial markets with cash in an effort to spur lending and combat deflation.
But through the statement, the central bank might be indicating deflation is no longer a concern.
"The bank judges that the main macroeconomic risks to the inflation projection are roughly balanced," it said, with upside risks being stronger-than-projected growth, while a protracted recovery and strong Canadian dollar flagged as downside risks.
The change in the inflation outlook emerged after Statistics Canada reported that the economy grew at a five per cent annualized rate in the fourth quarter of last year - blowing past market expectations for a four per cent gain and the central bank's original 3.3 per cent forecast. Economists say the fourth-quarter performance has set the stage for another robust gain, of perhaps four per cent or more, for the first three months of 2010.
Recent data indicate that both the headline and core inflation rates have moved much closer to the two per cent level than the central bank had expected. Under the bank's forecast, the two per cent level would not be reached until the third quarter of next year.
"Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity," the central bank said in its one-page statement. "The outlook for inflation should continue to reflect the combined influences of stronger domestic demand, slowing wage growth, and overall excess (economic slack)."
In its economic outlook in January, the central bank said stubborn unit labour costs along with increases in property taxes and other administered prices accounted for the recent "stickiness" of core inflation.
Michael Gregory, senior economist at BMO Capital Markets, said prior to the release of the rate statement that "the longer this (inflation) stickiness persists, the more likely it might also reflect an overestimation of the size and impact of the output gap," which measures the amount of economic slack in the marketplace.
Other economists, most notably at National Bank Financial, have argued the central bank has overestimated the amount of slack in the economy, and that recent economic data suggest spare capacity is being absorbed at a faster pace than anticipated. The bank has said it expected the output gap to close in the third quarter of 2011.
A large amount of excess production capacity suggests a lack of consumer demand, and gives producers little to no pricing power.
Meanwhile, the central bank also acknowledged that economic activity has been "slightly higher" than its own projections, with the five per cent gain in the fourth quarter powered by "vigorous domestic demand" and a recovery in exports.
"The underlying factors supporting Canada's recovery are largely unchanged - policy stimulus, increased confidence, improved financial conditions, global growth and higher terms of trade," the bank statement said.
It added that "persistent strength" in the Canadian currency and the "low absolute level" of U.S. demand would continue to act as "significant drags" on economic activity.
The central bank's next statement on interest rates is April 20, and two days later it will release its updated economic forecast. Meanwhile, the governor, Mark Carney, has scheduled two speeches this month in which he may provide further guidance as to how the bank would behave as its conditional pledge comes to an end.
© Copyright (c) Canwest News ServicePost Content |
posted by MIke Toporowsky at 7:34 am |
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Mike Toporowsky AMP
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