Bank of Canada Announced - No Change, again.

April 16, 2014 | Posted by: Patrick Mulhern

 

 

 Poloz frets over export recovery, keeps rate-hike timing steady

BARRIE McKENNA

OTTAWA — The Globe and Mail

Published Wednesday, Apr. 16 2014, 10:07 AM EDT

 

The cheaper dollar and rising energy prices are pushing inflation closer to the Bank of Canada’s critical 2-per-cent target, but apparently not enough to alter the timing of the next interest rate hike.

The central bank kept its trend-setting overnight rate at 1 per cent for the 29th consecutive time Wednesday, a span dating back to September 2010.

Mimicking language in its March statement, the bank said the weak economy continues to justify current rock-bottom rates, which influence a broad range of other interest rates, including bond yields and mortgages.

Total inflation is running much higher than the bank predicted just three months ago and will hit 2 per cent early next year, according to the bank’s latest forecast.

But much of this upward price pressure will be temporary, and Canada’s weak economy will keep less volatile core inflation, which excludes food and energy prices, persistently low for another two years, the bank said.

“Core inflation is expected to stay well below 2 per cent this year due to the effects of economic slack and heightened retail competition, and these effects will persist until early 2016,” the bank said in statement.

Most economists expect the Bank of Canada’s next move to be a rate hike, sometime in mid– to late 2015. And Wednesday’s statement isn’t likely to change that.

“Nothing in here to alter our view that the Bank’s next move is still a year off,” said economist Avery Shenfeld of CIBC World Markets.

Speaking to reporters, Governor Stephen Poloz insisted that a rate cut from the central bank remains a possibility, in spite of its forecast of higher inflation.

“We are [in] neutral,” Mr. Poloz said during a webcast news conference from Toronto, where he was attending former Finance Minister Jim Flaherty’s funeral. “That means rate cuts can’t be taken off the table.”

He warned that unless exports and business investments pick up, inflation will fade again, leading to unusually weak inflation in 2015 and beyond. And while all the “ingredients” are in place for better exports, the rebound remains elusive, he added.

The bank raised its estimate for the consumer price index by four basis-points in each of the four quarters of this year, compared to its January forecast. That’s a reflection of both a cheaper Canadian dollar, which has lost roughly 10 per cent versus the U.S. dollar in the past year, plus higher gasoline and natural gas prices.

The central bank now expects inflation to be running at an annual rate of 1.3-1.9 per cent this year and 2 per cent throughout 2015.

Core inflation, on the other hand, is more subdued, and won’t hit the bank’s 2-per-cent target until 2016. The bank strives to keep inflation at or near its 2-per-cent target, moving its benchmark rate higher to keep a lid on prices, or cutting them to spur demand.

The bank also lowered its forecast for growth in the first quarter to 1.5 per cent from 2.5 per cent, as widely expected – a period affected by bad weather and weak exports.

But its forecast for the rest of 2014 and 2015 remains largely unchanged, with growth expected to average 2.5 per cent per year.

The bank also continues to fret about the slow recovery of Canadian exports, which have been battered by a loss of market share in the U.S. market, and more recently, harsh winter weather across much of North America.

“Competitive challenges continue to weigh on Canadian exporters’ ability to benefit from stronger growth abroad,” the bank said.

The bank warned in its monetary policy report, also released Wednesday, that Canada’s non-energy exports remain disappointing and will recover more slowly than expected. It expects exports to contribute much less to growth this year than it expected just three months ago.

Most worryingly, Canada’s share of U.S. imports of non-energy products has fallen to less than 22 per cent from nearly 29 per cent in 2000, according to a chart contained in the report. Canada’s share of the U.S. energy market, meanwhile, has done almost exactly the opposite, rising sharply in the past three years.

Nonetheless, the bank said demand in the U.S., which consumes 70 per cent of Canadian exports, could also wind up being stronger, and the longer-term outlook remains good.

“The economic recovery in the United States appears to be on track, despite soft readings in the last few months largely due to unusual weather,” according to the statement.

Mr. Poloz and his central bank colleagues also expressed concern that Europe’s “nascent recovery” could be knocked off track by the crisis in Ukraine and about “financial vulnerabilities” in China and other emerging market economies.

And the bank reiterated that while it expects a “soft landing” of the domestic housing market, household debt remains high and “would pose a significant risk should economic conditions deteriorate.”

The housing market has already begun to cool in many key markets across the country.

 

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