Signals worry about Canadian dollar, exports
OTTAWA—The Canadian and global economies are recovering, but not enough to start raising interest rates, the Bank of Canada said.
For the third time since September, the central bank kept its overnight rate at one per cent.
The bank said recovery is proceeding faster than expected, especially in the US, but it cited ongoing risks, such as debt in Europe and weak international banks.
The bank upgraded Canada’s economic growth forecast to 2.4 per cent this year and 2.8 per cent next, slightly better than its last projection in October.
But economists had expected an even bigger revision, given that commodity prices had rebounded and the US looks set for a much stronger year thanks to new policy initiatives to stimulate growth.
“It’s a little more dovish than we would have expected… frankly, their forecast revision from October is modest to say the least,” said economist Douglas Porter of BMO Capital Markets.
He noted that the bank’s 2.4 per cent forecast is a tick lower than the consensus and well below some, such as the Royal Bank’s 3.2 per cent growth prediction.
Scotiabank economists said the bank’s cautious tone suggests it will keep interest rates low for some time, possibly until the fall, although other analysts continued to point to a May or July date.
Porter said fear about giving even more boost to the dollar may keep the bank from signalling when it is hiking interest rates until the last moment.
The bank signalled it is clearly worried about the Canadian dollar, which is currently trading over parity with the U.S. currency, and the low productivity of Canadian businesses.
“The cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high,’” it said.
The economy’s positives, the bank said, were the growing strength of business investment and net exports, despite the dollar’s strength.