July 17 (Bloomberg) -- Bank of Canada Governor Stephen Poloz kept his main interest rate unchanged at his first policy decision and said there will be a “gradual normalization” of borrowing costs over time as slack in the economy disappears and inflation picks up.
Policy makers led by Poloz kept Canada’s benchmark rate on overnight loans between commercial banks at 1 percent for the 23rd consecutive announcement in Ottawa today, as forecast by all 20 economists in a Bloomberg News survey.
“As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate,” the bank said in a statement. “Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected.”
Poloz, 57, is counting on exports and business investment to accelerate growth in the world’s 11th-largest economy through 2015 with consumers weighed down by near-record debts. The first rate decision by the former head of Canada’s export-financing arm echoed themes laid out by his predecessor Mark Carney, who said in May that rates would rise after “a period of time.”
“It’s still overall dovish in its leaning, they still retain the rate hike guidance but they use different language to explain it,” said Derek Holt, Scotiabank’s vice president of economics in Toronto. “The bank is on hold into 2015 and I still see the tail risk as later rather than sooner.”
JPMorgan Chase & Co. pushed back its forecast for a policy rate increase by three months to the fourth quarter of 2014, citing “nuanced” wording changes “that appear to be slightly more dovish than previously,” senior economist Sandy Batten said in an e-mail.
Poloz said the bias statement isn’t meant to be a sign that borrowing costs are about to rise.
“What we’re trying to explain is what the natural process of getting home will look like,” Poloz said at a press conference following the report’s release. “It’s not some sort of attempt to signal anything except to explain what things will look like if all things go according to our projection.”
In an interview on Canadian Broadcasting Corp., Poloz said “for the time being, nothing will happen to rates,” adding that “a soft landing is emerging” in the country’s housing market.
The Canadian dollar was trading at C$1.0402 per U.S. dollar at 5:30 p.m. in Toronto, 0.3 percent weaker than late yesterday. One dollar buys 96.14 U.S. cents. Government bond yields fell, with the benchmark 2-year note dropping 2 basis points to 1.10 percent.
Policy makers cut a reference to the Canadian dollar’s “persistent strength” as they reduced the assumption for its value to 96 U.S. cents from 98 U.S. cents, in line with its recent trading range.
Poloz declined to comment on the currency’s decline at the press conference earlier today.
“We’d prefer not to offer a running commentary on the dollar,” Poloz said. “There’s no question Canadian companies continue to face competitive headwinds in the export space.”
The Bank of Canada raised its economic growth forecast for this year to 1.8 percent from an April prediction of 1.5 percent, while lowering the 2014 projection to 2.7 percent from 2.8 percent. Both figures exceed Bloomberg consensus forecasts of 1.7 percent and 2.4 percent.
Poloz retained predictions that the economy will reach full output and inflation will reach the bank’s 2 percent target in mid-2015, adding that growth will be “choppy” over the next few months because of events such as flooding in Alberta and a construction strike in Quebec. Growth slowed to a 1 percent annualized pace in the second quarter and will be 3.8 percent in the July-to-September period, the bank forecast.
The inflation rate in May was 0.7 percent, following the 0.4 percent reading in April that was the slowest since the end of the last recession three years ago. Consumer prices have been below the central bank’s 2 percent target for a year.
The exports that make up about a third of the economy won’t return to a pre-recession peak until the second half of 2014, the central bank said, citing weak global demand and companies that lack competitiveness.
Canada’s economy has “material excess capacity” that equaled about 1.25 percent of gross domestic product in the second quarter, the central bank said.
Some companies are struggling to build their capacity and sales. Domtar Corp., a Montreal-based pulp and paper manufacturer, slumped the most in more than two months on July 12 following an unexpected second-quarter operating loss as maintenance costs increased and pulp productivity fell.
The Bank of Canada added weak growth in China and other emerging markets to today’s list of risks to their outlook, along with Europe’s debt crisis, a possible surge in U.S. demand and imbalances in the finances of Canadian consumers.
Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year and has warned about the risks of overbuilding in Toronto and Vancouver, the country’s largest and third-largest cities. Existing home sales rose 3.3 percent in June, almost matching the previous month’s gain that was the fastest in more than two years, according to a July 15 the Canadian Real Estate Association report.
Poloz said today he’s “comforted” by recent data. “Indebtedness appears to have peaked and has rolled over, credit data have slowed significantly,” he said.
“As I read the situation right now, the new data we have from the housing sector are just as consistent with the soft landing as they might be with a rebound,” Poloz said. “It’s in that sort of gray zone.”
To contact the reporter on this story: Greg Quinn in Ottawa at firstname.lastname@example.org