JEREMY TOROBIN
OTTAWA— Globe and Mail Update Published Tuesday, Apr. 17, 2012 9:02AM EDT Last updated Tuesday, Apr. 17, 2012 10:02AM EDT
The Bank of Canada left its main interest rate untouched at 1 per cent Tuesday, while painting a brighter economic outlook and hinting for the first time since last summer that it is beginning to look for an opportunity to raise borrowing costs.
The decision to stand pat for a 13th consecutive meeting was expected. But after weeks of sunnier rhetoric from Governor Mark Carney amid a strengthening domestic recovery, Bay Street analysts had been debating how far he would go in trying to reshape expectations that he may be on hold until late next year.
The statement on Tuesday’s decision was vague about timing, saying only that it may become necessary to increase rates, but that this would depend on “domestic and global economic developments.” However, just by saying so, Mr. Carney is clearly starting to lay the ground work for rate hikes if the Canadian economy and the global backdrop continue to improve. Significantly, he boosted his 2012 growth forecast for Canada by four tenths of a percentage point, to 2.4 per cent. And though he cut his 2013 forecast by the same amount, to 2.4 per cent, the slack in the economy is now projected to be chewed up in the first half of 2013 instead of in the third quarter of next year, so possibly six months earlier.
“The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated,” Mr. Carney and his rate-setting panel said, adding that the confidence of households and businesses is improving more quickly as a result and both are driving the recovery. “In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
That last point may not sound like much, but it represents the first time since last September that the central bank has made any formal reference in a rate statement to the possibility of hiking interest rates. In that instance, it was to say that the need to remove monetary stimulus had “diminished,” as escalating debt dramas on either side of the Atlantic Ocean threatened to scuttle the global rebound, a reversal of a decision in July that had been used to hint that a hike might come sooner than later.
Mr. Carney and his team will release a quarterly forecast paper on Wednesday, but Tuesday’s decision included some of the highlights.
On top of the new growth forecasts and the earlier timeline for the economy to be running at full tilt — which may prompt analysts to pencil in the possibility of a rate hike before the end of 2012 — the central bank confirmed recent hints that the outlook for inflation in Canada is “somewhat firmer” due to the stronger recovery and higher gasoline prices. (Still, inflation is expected to be around the central bank’s 2 per cent target for the bulk of policy makers’ projection period.)
Policy makers repeated that household debt remains the biggest domestic economic risk, and that exports will be restrained by competitiveness challenges such as the strong Canadian dollar. While the central bank also said private domestic demand will account for almost all of Canada’s growth over the next couple of years, an indication of healthy momentum, those other two remarks are likely reminders that any tightening will be very cautious and gradual.
Globally, policy makers made no specific reference to the ongoing euro crisis for the first time in several months, other than to say that Europe will “emerge slowly from recession in the second half of 2012” and to acknowledge that the risks around that upgraded view “remain high.” The outlook for U.S. growth is “slightly stronger,” the bank said, as the world’s biggest economy sees better labour-market and financial conditions, but will be held back as households and governments trim their debt.
The emerging markets that have led global growth since the recession will moderate to a “still-robust pace,” as policy makers in those countries take various easing measures.
At the same time, the central bank warned that global oil prices have risen to the point where they are “considerably higher” than the compensation received by Canadian producers. “If sustained, these oil price developments could dampen the improvement in economic momentum,” said the central bank, which is expected to include an analysis in its forecast of how oil prices affect the Canadian economy.
The central bank will expand on all of these themes in the full forecast that it will release Wednesday at 10:30 a.m. in Ottawa, followed by a press conference later in the morning with Mr. Carney and Senior Deputy Governor Tiff Macklem. The next policy decision is on June 5.
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