Warns of worsening global conditions and financial deterioration
OTTAWA: The Bank of Canada is holding off on raising interest rates for awhile longer – and perhaps a lot longer – citing worsening global conditions and an uneven Canadian recovery that is not quite as strong as it recently thought.
The decision to keep the bank’s trendsetting overnight rate at one per cent for the 14th consecutive policy announcement was widely expected.
Also not surprisingly, the Bank of Canada has quickly acknowledged that the hopeful monetary policy review delivered by Gov. Mark Carney in April may have been premature.
In a more pessimistic take, Carney and his policy setting council conceded in the outlook for global growth has weakened in the past few weeks, and that Europe has gone from a risky environment to one in which the risks are now reality.
“This is leading to a sharp deterioration in global financial conditions,” the bank said in a statement accompanying its rate announcement.
The global economic problems extend beyond Europe, the bank added.
“While the US economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected,’’ the bank said.
“More modest global momentum and heightened financial risk aversion have reduced commodity prices.’’
In Canada, the bank concedes that the 1.9% growth in gross domestic product registered in the first quarter was disappointing – the bank indicated in April it was looking for 2.5% growth. But it says overall the economy is holding up because of a strong housing sector, still-positive business and consumer confidence, and the low interest rate environment.
Still, it notes that difficult foreign markets, along with the persistent strength of the Canadian dollar, means exports will remain weak. Although credit has boosted growth, the bank took note that “households continue to add to their debt burden in an environment of modest income growth.’’
Carney has long expressed concern that Canadians were borrowing too much it times of low interest rates, and will be trapped with high payment obligations once rates start normalizing. It is believed to be one of the main reasons the central banker wants to start raising rates as quickly as conditions allow.
The bank and markets will get a better reading of how the Canadian economy is holding up against the stiffening headwinds from abroad on Friday when Statistics Canada reports on job growth – or contraction – for the month of May.
The past two months have seen employment expand by an eye-popping 140,000 jobs, but many economists are not convinced and expect to see some payback Friday and in subsequent months.
In the one-page statement, Carney makes clear that he is still itching to return to a more normal policy setting.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary stimulus may become appropriate,’’ he writes.
That’s a little less hawkish that what he said in April, but the intent remains the same.
There is no pressure from inflation to raise rates, however, the bank adds. With the economy operating with excess capacity and gasoline prices dropping, it expects the consumer price index to drop below two per cent in the next little while.
© 2012 The Canadian Press