Category: Economic

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The Bank of Canada’s monetary policy is appropriate to return Canadian inflation to its 2 per cent target as worldwide economic uncertainty lingers, Governor Stephen S. Poloz said today in Toronto.

The global economy is facing significant headwinds that could restrain growth for a prolonged period, including efforts by households and financial institutions to reduce their debt and those by governments to bring their fiscal situation back toward balance, Governor Poloz told attendees at the annual conference of the Canadian Council for Public-Private Partnerships.

“Probably the most important headwind is lingering uncertainty about the future, whether from geopolitical developments, market volatility, or just the trauma that companies have been through,” he said. “We are confident that these headwinds will dissipate in time, but in the meantime interest rates will remain lower than in the past in order to work against those forces.”

The Bank of Canada has adopted a risk-management approach to incorporate these elements of uncertainty directly in its policy decision-making and clearly communicate them to Canadians, Governor Poloz said, citing the ranges the Bank now provides when it presents forecasts of key variables like growth, inflation, the output gap and the neutral rate of interest.

The prolonged global economic cycle has taken its toll on Canada’s export sector, the Governor also said. After studying more than 2,000 categories of underperforming non-energy exports, the Bank found that for about a quarter of them the value of shipments fell by more than 75 per cent since 2000, creating a shortfall of about $30 billion relative to the historical norm and destroying the associated jobs.

“The good news is that these destructive effects of the recession and slow recovery should be reversible over time,” Governor Poloz said. “A sustained expansion in our exports will not only represent new demand, it will ignite the rebuilding phase of our business cycle, which through increased investment will create new supply and new jobs. This virtuous cycle will continue until the excess capacity in the labour market is reabsorbed.”

While some fear that keeping interest rates low will sow the seeds of the next financial crisis, Governor Poloz observed that the alternative would be much worse. The Bank estimates that if the policy interest rate had been at 3.5 per cent in both Canada and the U.S. since the beginning of 2011, Canada’s unemployment rate would be 2 percentage points higher today and core inflation would be well below 1%.

“From this monetary policy-maker’s perspective, that’s an unattractive alternative,” Governor Poloz said. “Our primary job is to pursue our 2 per cent inflation target, with a degree of flexibility around the time horizon of its achievement; that flexibility permits the Bank to give due consideration to financial stability risks, provided they do not threaten macroeconomic performance.”

Source:: http://www.bankofcanada.ca/2014/11/bank-canada-policy-appropriate-face-uncertainty/

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The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation in Canada is close to the 2 per cent target. Core inflation rose more rapidly than was expected in the Bank’s July Monetary Policy Report (MPR), mainly reflecting unexpected sector-specific factors. Total CPI inflation is evolving broadly as expected, as the pickup in core inflation was largely offset by lower energy prices. Underlying inflationary pressures are muted, given the persistent slack in the economy and the continued effects of competition in the retail sector.

Although the outlook remains for stronger momentum in the global economy in 2015 and 2016, the profile is weaker than in July and growth prospects are diverging across regions. Persistent headwinds continue to buffet most economies and growth remains reliant on exceptional policy stimulus. Against a background of ongoing geopolitical uncertainties and lower confidence, energy prices have declined and there has been a significant correction in global financial markets, resulting in lower government bond yields. Despite weakness elsewhere, the U.S. economy is gaining traction, particularly in sectors that are beneficial to Canada’s export prospects.  The U.S. dollar has strengthened against other major currencies, including the Canadian dollar.

In this context, Canada’s exports have begun to respond. However, business investment remains weak. Meanwhile, the housing market and consumer spending are showing renewed vigour and auto sales have reached record highs, all fuelled by very low borrowing rates. The lower terms of trade will have a tempering effect on income.

Canada’s real GDP growth is projected to average close to 2 1/2 per cent over the next year before slowing gradually to 2 per cent by the end of 2016, roughly the estimated growth rate of potential output. As global headwinds recede, confidence in the sustainability of domestic and global demand should improve and business investment should pick up. Together with a moderation in the growth of household spending, this is expected to gradually return Canada’s economy to a more balanced growth path. As the economy reaches its full capacity in the second half of 2016, both core and total CPI inflation are projected to be about 2 per cent on a sustained basis.

Weighing all of these factors, the Bank judges that the risks to its inflation projection are roughly balanced. Meanwhile, the financial stability risks associated with household imbalances are edging higher. Overall, the balance of risks falls within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.

Information note:

The next scheduled date for announcing the overnight rate target is 3 December 2014. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 21 January 2015. 

Source:: http://www.bankofcanada.ca/2014/10/fad-press-release-2014-10-22/