Wednesday, April 23, 2014

BoC keeps interest rate anchored

OTTAWA—The Bank of Canada is keeping its trend-setting interest rate anchored at one percent for the remainder of the year but sending a message that it still believes the cost of borrowing will go up at some point in the future.
The decision by the central bank’s policy-setting panel was in line with the expectations of markets and economists, who had given only low odds to governor Mark Carney removing a mild bias towards raising rates sometime.

The dollar gained strength after the announcement. It was up 0.19 of a cent to 100.7 cents (U.S.)—slightly higher than just prior to the central bank’s announcement.
The bank’s statement today acknowledged the economy is weaker than it expected, but suggested it is mostly looking through the soft patch as a temporary aberration.
Last week, Statistics Canada reported the country’s gross domestic product output had slowed to 0.6 percent—about half what the bank had predicted in October and the weakest result in more than a year.
“Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013,” the bank stated.
Tying improved conditions to 2013 suggests Carney, who has announced his intention to step down in June to take charge of the Bank of England, now realizes the economy is unlikely to live up to his 2.5 percent hopes in the fourth quarter, as well.
Bank of Montreal deputy chief economist Doug Porter added Carney has no choice but to await the outcome of ongoing “fiscal cliff” negotiations in Washington designed to head off automatic tax increases and spending cuts in January.
Policy-makers have calculated the shock could be enough to send both the U.S. and Canada back into recession.
“I think the bank is hedging their bets on the expected upturn of the Canadian economy,” Porter explained.
“We could have the Republicans and Democrats holding hands and singing ‘Kumbaya,’ and the markets would have a tremendous rally and the economy could come flying out of the gate in 2013,” he noted.
“The opposite is that we get a bit of a train wreck.”
As it is, Carney said the uncertainty over whether Washington will be able to avoid figuratively going over the cliff already is impacting the economy, another reason for looking through the current weakness.
Retaining the bias for higher rates—even as the economy softens—serves Carney’s purpose of reminding consumers not to count on super-low rates indefinitely.
Today marked the 18th-consecutive time Carney has kept the policy rate at one percent, comprising over two years, the longest stretch of stability since the 1950s.

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