Bank of Canada leaves key interest rate unchanged
Low rates likely to linger until economy is looking stronger
The Bank of Canada left its benchmark interest rate unchanged at one per cent today.
An unchanged rate means governor Stephen Poloz does not believe the Canadian economy is strong enough to withstand higher interest rates, despite lingering concern about high consumer debt and rising housing prices.
Poloz is not scheduled to discuss his decision publicly on Wednesday, but the analysis accompanying his announcement notes that inflation is approaching the two per cent target rate earlier than anticipated.
The loonie ended the trading day down 0.24 of a cent to 91.42 cents US as traders reacted to the central bank signal that it is in no rush to raise rates.
The benchmark overnight rate is used by retail banks to set rates for savers and borrowers, though the range of consumer rates may vary depending on bond yields.
The rate has been a one per cent for more than three years, dating back to September 2010, the longest stretch of level rates in Canadian history.
Poloz is dealing with a mixed bag of economic results, including exports that have not yet picked up as quickly as anticipated and an unemployment rate of 7 per cent, with evidence of many long-term unemployed.
In March, Poloz reiterated a growth rate of 2.5 per cent this year for the Canadian economy, but told a business audience that slow growth is the new norm for developed economies.
Last month it noted only 1.2 per cent GDP growth rate in the first quarter, but Poloz's note this morning attributed that to "severe weather and supply constraints."
On Wednesday, Statistics Canada reported that Canadian exports tumbled by 1.8 per cent in April, a surprising result given the thawing of the economy that was thought to have happened after a long winter. The country is posting a trade deficit of $638 million.
But the Bank of Canada seemed optimistic about a turnaround.
"The ingredients for a pickup in exports remain in place, including the lower Canadian dollar and an anticipated strengthening of foreign demand. Improved corporate profits, especially in exchange rate-sensitive sectors, should also support higher business investment in the coming quarters," it said.
Canada's economy is unlikely to take off until the U.S. makes a decisive turnaround. That could boost Canadian exports and put more people back to work.
Also, there is unlikely to be pressure on Canadian interest rates until the U.S. Federal Reserve winds down its quantitative easing program later this year.
Fed chair Janet Yellen has said it will be a “considerable period” after the Fed stops buying U.S. bonds before she hikes interest rates.
No big shift
BMO chief economist Doug Porter said Poloz struck a "neutral" tone in his analysis.
"With policy on hold for such an extended period, the focus has been trained on the subtle shifts in the Bank’s language, and the big news this time was the absence of a big shift," Porter wrote in a note to investors.
"However, in a relatively terse release, we detected a heavier weighting on downside risks to the growth outlook than widely expected, and thus the sell-off in the Canadian dollar and the slip in short-term rates in the immediate aftermath."
Porter said he expects rates will remain low for at least another year.
TD senior economist Randall Bartlett points out that the bank is balancing an inflation rate that has hit its target rate and household debt it believes is too high, against GDP growth that is muted at best.
“Recent developments have made the Bank of Canada's job increasingly difficult, as it balances off a somewhat higher trajectory for CPI inflation against lacklustre real GDP growth in the first quarter of 2014,” Bartlett said.
He also says there will be a long horizon before rates rise, possibly in second half of 2015.