Canadian Manufacturing

Bank of Canada’s Carney keeps rate at 1%; modifies outlook

Still, the bank pegged average growth at 2.2 per cent this year, one-tenth higher than projections in July.



OTTAWA—The Bank of Canada is keeping its trendsetting policy interest rate at one per cent for a while longer, and likely a whole lot longer.

The central bank said the Canadian economy continues to expand, but that housing activity is starting to decline and exports remain weak.

Still, the bank pegged average growth at 2.2 per cent this year, one-tenth higher than projections in July.

Analysts had been expecting bank governor Mark Carney to soften his hawkish tone about future interest rate hikes and he obliged, saying modest withdrawal of stimulus will be required over time.

That suggests the time may be a long way off.

The bank also notes it will consider the health of the household sector in setting monetary policy, something it hasn’t done in previous interest rates announcements.

Scotiabank economist Derek Holt said the signal from the Bank of Canada that it will tone down its hawkish language came last Monday, when Carney dropped the sentence from a speech he gave in British Columbia. The dollar fell more than half a cent the next day.

“If the (bank) felt that the speech had been misinterpreted by markets … then it would have had the following day to correct misperceptions,” Holt explained in a note to clients. “The fact that it chose not to do so only reinforced the likely intent.”

Desjardins economist Jimmy Jean cites three factors for Carney’s dovish turn: Inflation is below expectations, the economy is underperforming and businesses are telling anyone who asks, including the Bank of Canada’s business outlook survey of last week, that they are paring down investment plans.

In July, the bank said it expected the economy to grow by 2.1 per cent this year, 2.3 next year and by 2.5 in 2014.

While modest, even that growth profile now looks optimistic after less than two per cent growth in consecutive quarters, with the third quarter, ending in September, looking no stronger.

The Conference Board said Monday it expects growth to average only 1.8 per cent this year, near where most forecasters now have the economy.

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