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Bank of Canada Forecast Includes `Gradual' Rate Rises to Curb Inflation
The Bank of Canada said its economic forecast includes “gradual” interest-rate increases to control inflation in an economic recovery hampered by slower foreign demand and needing private expenditures to replace government stimulus.
Europe’s debt crisis will reduce Canada’s output by 0.1 percent this year and 0.3 percent in 2011, and spending will be sluggish in the U.S., Canada’s biggest trade partner, the central bank said in a Monetary Policy Report. About half of Canada’s growth through 2012 will come from consumer spending, while government becomes a drag starting next year, the report said.
Governor Mark Carney raised his benchmark interest rate two days ago, the second increase in a row, and said that further moves “would have to be weighed carefully” against the pace of the recovery. The report today added that “this projection includes a gradual reduction in monetary stimulus consistent with achieving the inflation target” of 2 percent.
The two statements “are linked by the fact that risks around the projection are elevated, and there’s no pre-ordained path for interest rates,” Carney, 45, said at a press conference in Ottawa today.
‘Very Much Appropriate’
Other Group of Seven central banks are keeping rates at or near record lows to sustain their recoveries. Carney will raise rates at the bank’s September and October meetings before pausing in December, according to Meny Grauman, a senior economist at Canadian Imperial Bank of Commerce in Toronto.
Such a gradual path is “very much appropriate considering the global economic environment and the pace of recovery around the world that the Bank of Canada has highlighted,” Grauman said.
The rate on the six-month overnight index swap, a measure of what investors say the central bank’s key rate will average over that time, increased to 0.935 percent today from 0.915 percent yesterday. The Canadian dollar gained 1 percent to C$1.0388 per U.S. dollar at 4:21 p.m. in Toronto from C$1.0491 yesterday. One Canadian dollar buys 96.26 U.S. cents.
The annual rate of economic growth will slow to 2.8 percent in the third quarter from the decade-high pace of 6.1 percent in the first quarter, the bank said. Inflation excluding the impact of changes in provincial sales taxes will average 1.7 percent in the July-September period. The overall inflation rate and the core rate that excludes eight volatile items “are expected to remain near 2 percent” through 2012, the report said.
Lower Growth Forecast
The bank on July 20 trimmed its Canada growth forecast for this year to 3.5 percent from 3.7 percent. The economy will grow 2.9 percent in 2011 and 2.2 percent in 2012, the bank said. It estimated the U.S. economy will grow 2.9 percent this year, lower than an April estimate of 3.1 percent. The U.S. economy will expand 3 percent in 2011, the bank said, cutting its earlier forecast of 3.5 percent.
“The hand-off from public stimulus to private demand in advanced economies is proceeding but has yet to be accomplished,” the report said.
Carney repeated a statement made two days ago that the key rate of 0.75 percent leaves “considerable” monetary stimulus in place. He also said there is little chance of a ‘double-dip’ recession in Canada, and output has almost returned to its peak before a recession that ended last year.
The bank cut its assumption for the Canadian dollar to 96 U.S. cents from an April assumption of 99 U.S. cents.
Government spending will add 1.4 percentage points to the expansion this year and subtract 0.2 point next year and 0.5 percent in 2012, the bank said. Consumption will add 1.9 points to growth this year, and 1.4 points in 2011 and 2012. Trade will shave 1.6 points off this year’s growth rate, double the April estimate.
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.
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