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Rate Hikes Delayed As Bank of Canada Cuts Forecast

The Bank of Canada trimmed its forecast for economic growth this year, and said eventual interest-rate increases likely will be delayed.

Policy makers said Canada’s gross domestic product would expand 2 per cent in 2013, compared with an October estimate of 2.3 per cent. GDP likely grew only 1.9 per cent last year, compared with the central bank’s autumn expectation of 2 per cent.

The change in outlook reflects Canada’s struggle to find a growth engine to replace a fast cooling housing market. The downgrade isn’t big enough to require lower interest rates, but it is reason enough to keep borrowing costs lower for longer. The Bank of Canada said at the end of its latest policy deliberations Wednesday that the economy now likely won’t grow fast enough to stoke inflation until the second half of 2014, later than previously thought.

Officials opted Wednesday to leave the benchmark borrowing rate unchanged at 1 per cent, where it’s been for more than two years, but dispatched with language that indicated worry that rising house prices and consumer debt posed a threat to the financial system.

While continuing to say that a “modest” withdrawal of monetary stimulus remains likely over time, policy makers concluded that the “more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent that previously anticipated.”

The statement suggests Bank of Canada Governor Mark Carney is satisfied that he and Finance Minister Jim Flaherty have successfully deflating Canada’s housing bubble without having to raise interest rates, a move that would have cooled demand for houses, but hurt the broader economy. “The bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels,” the statement said.

But behind that victory is another battle: Canada’s economy has hit a patch of trouble.

The Bank of Canada’s domestic outlook has grown darker even as its view on the rest of the world has become brighter. While international demand remains less than it was before the financial crisis, policy makers said global “tail risks have diminished,” meaning they are less concerned about unexpected consequences from the Europe’s debt crisis and budgetary brinksmanship in the United States. “Global financial conditions are more stimulative,” the central bank said.

In Canada, policy makers expect gradual economic improvement in the economy over the course of the year. But the country is ill-prepared to take full advantage of stronger international conditions. Exports will improve, but not enough to offset weaker household spending – and not enough to return to their prerecession peak until the second half of 2014, the Bank of Canada said.

The International Monetary Fund also cut its forecast for Canada on Wednesday, dropping its outlook for the country to 1.8 per cent in 2013, compared to its October estimate of 2 per cent. Canada no longer can lay claim to the mantle of fastest growing Group of Seven economy, as the IMF projects the U.S. to outpace Canada through 2014. The IMF predicted the global economy would 3.5 per cent this year, a downgrade of 0.1 percentage points from October.

The Bank of Canada’s revised outlook for global economic growth actually is a bit lower, at 2.9 per cent in 2013 compared with a previous estimate of 3.1 per cent. That’s mostly because Europe’s recession has been deeper and more persistent than anticipated. The Bank of Canada is more optimistic about the United States, raising its outlook for the growth in Canada’s predominant trading partner to 2.3 per cent in 2013 from 2.1 per cent previously. The central bank also sees slightly better growth in China, the world’s second-largest economy after the United States.

A growing global economy will support energy and commodity prices. That’s a positive for Canada, a major exporter of oil and other commodities, but not as a big a positive as it could be.

The Bank of Canada noted Wednesday that Canada’s oil is trading at a record discount against “historically elevated” prices because of “persistent transportation bottlenecks.” That’s a comment on Canada’s inability to build pipelines fast enough to keep up with its growing supply. The result is a glut of oil at U.S. refineries that has created a pricing gap of as much as $50 a barrel compared with international benchmarks. This problem is exacerbated by the fact that much of central Canada pays the higher international price, even as a stronger currency squeezes the region’s manufacturers.




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