Bank of Canada Governor Mark Carney held his benchmark interest rate at 1 per cent Wednesday and suggested his year-long pause will last much longer as a bleaker outlook for the global economy quashes any urgency to make it harder to borrow and spend.
In explaining the decision to leave borrowing costs alone for an eighth meeting, as expected, the central bank said it believes Canada’se conomy is growing again after stalling in the second quarter, but painted a troubling picture for the United States and Europe, and said exports will be a “major source of weakness.”In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished,” the central bank said.
“The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2-per-cent inflation target over the medium term.’’
Without doing so explicitly, the central bank also left the door open for an interest-rate cut should the external backdrop deteriorate further, in part by reiterating it is less worried about inflation than just weeks ago when policy makers hinted they might raise rates by the end of the year.
Still, the Canadian dollar made a small gain against the U.S. currency after Mr. Carney’s decision. And economists generally interpreted his language as suggesting he will stay on hold until mid-2012 or later, but reckoned he will eventually need to raise rates if the rebound survives the current turmoil.
“Once again, the tug-of-war between offshore and internal factors is holding the Canadian economy and Bank of Canada policy in limbo,’’ Michael Gregory, a senior economist at BMO Nesbitt Burns, said in a note to clients. “We still judge (as does Carney & Co.) that at least modest growth will resume in(the second half of 2011) and push the Bank’s policy bias back to the tightening side.’’
Policy makers did not include new projections for growth and inflation in their statement, tracking closely to comments Mr. Carney made on Aug. 19, when he appeared with Finance Minister Jim Flaherty before an emergency meeting of the House of Commons finance committee. The recovery has likely resumed, the bank said, after gross domestic product shrank at a 0.4-per-cent annual rate in the second quarter, and growth will be led by business investment and household spending.
However, policy makers said, “lower wealth and incomes will likely moderate the pace of investment and consumption growth,” even as the supply and cost of credit for both businesses and households “remain very stimulative.”
Financial conditions have tightened some and could continue to do so should the global situation worsen, the bank said. Plus, net exports – the difference between what Canadians buy from overseas and what they sell abroad – will be a big drag on the economy, both because of weaker demand around the world and because of “ongoing competitive challenges” like a currency that, while weaker in recent weeks, is still near parity.
Several of the “downside risks” the central bank has identified for the global rebound’s trajectory have come to fruition, policy makers said.
“The global economic outlook has deteriorated in recent weeks,” the bank said. “The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply.’’
The fiscal and financial strains linked to Europe’s crisis have caused upheaval in markets as investors shy away from risk, and “could prompt more severe dislocations” in global markets.
Resolving those strains, the bank said, “will require additional significant initiatives by European authorities,” – an obvious yet significant comment given that in July the central bank said its outlook for the economy at that point assumed that Europe would be able to contain the crisis.
South of the border, Canada’s main export market will see weaker growth than the central bank was anticipating, policy makers said, and household spending “will be even more subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions.”
Moreover, the stimulus spending that propped up the U.S. recovery from its worst downturn since the Great Depression will soon give way to restraint and cuts that will undoubtedly crimp U.S. growth.
And although growth in emerging markets like China and India is still “robust” and commodity prices will remain “relatively high,” as those rapidly-expanding economies lift the rest of the world, they too will be affected by sluggishness in the developed world, as consumers and businesses everywhere retrench.
The global recovery’s decline in momentum will keep Canadian inflation in check, the bank said, as energy and food prices ease, wage growth “stays modest” and Canadian companies improve their productivity in the face of the slowdown.
The central bank’s decision comes in a potentially pivotal week that features a bevy of central bank policy meetings, a major speech by U.S. Federal Reserve chairman Ben Bernanke and a nationally televised address by U.S. President Barack Obama before a joint session of Congress, where he is expected to unveil a $300-billion (U.S.) plan to kick-start hiring in the world’s biggest economy.
The week concludes with a gathering of finance ministers and central bankers from the Group of Seven nations in Marseille, France, on Friday and Saturday.
Mr. Carney’s next interest-rate decision is scheduled for Oct. 25, and he will release an updated forecast for the Canadian and global economies the following day.