Bank of Canada Governor Mark Carney said his policy interest rate is likely to be unchanged for some time after inflation slowed more than projected, while reiterating his eventual next move will probably be an increase.
Policy makers kept the benchmark rate on overnight loans between commercial banks at 1 percent and softened language about tighter policy for the second meeting in a row, saying inflation will “remain low in the near term” in an economy with “material excess capacity.”
“The considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” policy makers led by Carney, 47, said in a statement from Ottawa today.
The world’s 11th largest economy has reported slower growth and inflation as well as job losses since Carney’s last announcement in January, when he said a rate increase was “less imminent.” Carney has signaled since April that the bank’s next move would probably be to tighten policy as his peers in the U.S. and Europe have added new stimulus.
“They have extended the pause but rates aren’t going lower,” said Derek Holt, vice-president of economics at Bank of Nova Scotia in Toronto, who predicts no increase this year or next. “They are using the more dovish turn to justify a longer pause as opposed to throwing a bone to the rate cut camp.”
The Canadian dollar fell 0.5 percent to C$1.0317 per U.S. dollar at 4:29 p.m. in Toronto. One Canadian dollar buys 96.93 U.S. cents. Yields on benchmark two-year Canada government bonds fell as far as 0.932 percent from 0.955 percent yesterday, and the Standard & Poor’s/TSX Composite Index rose 0.8 percent to 12,831.96.
Companies from truckers to pizza makers are reporting signs that domestic spending is slowing, while inconsistent global demand and strong Canadian dollar have generated nine straight trade deficits.
There are “a lot of clouds in the energy sector” Alain Bedard, Chief Executive Officer of Montreal-based trucking company TransForce Inc., said March 1.
“During the fourth quarter, consumers continued to be cautious spenders,” Paul Goddard, Chief Executive Officer of Pizza Pizza Royalty Corp., said on a Feb. 15 earnings call.
Statistics Canada said March 1 that output expanded at a 0.6 percent annualized pace in the fourth quarter, slower than Carney’s 1 percent January forecast. The 0.5 percent inflation rate seen in January remains well below his 2 percent target, while employment fell for the first time in six months.
The Bank of Canada didn’t update its January forecast that the economy will grow 2 percent this year, and today said it expects growth “to pick up through 2013” led by household spending, exports and investment.
“They partially acknowledged the softness in growth,” said Doug Porter, chief economist with BMO Capital Markets in Toronto, who predicts 1.5 percent expansion this year and an unchanged policy interest rate until the second half of 2014. “They couldn’t trot out the ‘less imminent’ again.”
Inflation will rise “gradually to reach 2 percent over the projection horizon as the economy returns to full capacity and inflation expectations remain well-anchored,” the Bank said in its statement.
“What has happened here is that they are facing the realities of low inflation and until that starts to move more towards the middle of the range they have no choice,” said John Clinkard, chief Canada economist at Deutsche Bank AG in Toronto.
Carney’s decision to keep the benchmark interest rate unchanged was expected by all 22 economists in a Bloomberg News survey, and comes one day before policy statements by the European Central Bank, the Bank of Japan and the Bank of England.
Finance Minister Jim Flaherty is meeting with private economists Friday in Ottawa ahead of a fiscal plan expected in the next few weeks. Flaherty said last week slower growth will make it harder to reach a goal of eliminating a deficit before the next federal election, due in 2015.
Today’s rate announcement is the third-last before Carney leaves Canada’s central bank June 1 to lead the Bank of England a month later. He will keep his other title as Chairman of the Financial Stability Board, the Basel, Switzerland-based body charged by the Group of 20 nations with developing rules to prevent another financial crisis.