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Bank of Canada keeps short-term rates low

Updated Tuesday, March 8, 2011  ::  Views (97490)

Mark Carney, Governor of the Bank of Canada, makes his way to a press conference to discuss the contenets of the Monetary Policy Report at the National Press Theatre in Ottawa on Wednesday, Oct. 20, 2010. THE CANADIAN PRESS/Sean Kilpatrick

Julian Beltrame, The Canadian Press, On Tuesday March 1, 2011, 10:50 pm EST
 
By Julian Beltrame, The Canadian Press
 
OTTAWA - The Bank of Canada is sticking to its ultra-low interest rate policy to help the recovery, despite mounting evidence the economy is performing better.
And economists said the central bank's surprisingly "dovish" statement suggests Canadians will be able to borrow at historically low interest rates for months to come.
 
The bank's decision Tuesday keeps its trendsetting overnight policy rate at one per cent, where it's been since last September .
Few had expected governor Mark Carney to raise rates, but analysts were looking for a signal of future hikes after news Monday that the economy grew by 3.3 per cent in the final quarter last year — a full point higher than the bank had projected.
 
"The recovery in Canada is proceeding slightly faster than expected and there is more evidence of the anticipated rebalancing of demand," the bank said in a grudging acknowledgment of robust fourth-quarter growth that many believe has carried over into the first quarter of 2011.
 
Most of the five-paragraph statement was devoted to highlighting that not much had changed and that the risks to the global recovery remain elevated. The bank also warned that the strong Canadian dollar and the poor productivity of Canadian firms will slow export growth.
 
On future intentions, the bank recycled a line used before that any tightening to monetary policy will need to be carefully considered.
"If the bank really was contemplating an early rate hike, we would have expected that forward looking guidance to be altered," said David Madani of Capital Economics.
 
TD Bank said the new economic data suggests the economy's non-inflationary growth potential is stronger than previously estimated, which means the Bank of Canada could upgrade its growth forecast without touching interest rates.
 
Carney's overriding message was similar to that of U.S. Federal Reserve chairman Ben Bernanke , who, in testimony to Congress on Tuesday, appeared equally wary of the traps that could still ensnare the economy.
 
Carney cited sovereign worries debt in Europe, the strong loonie, poor productivity and high commodity prices as possible areas of trouble.
"That's the general tone across global central banks. They have a huge uncertainty premium, because we just don't know how developments in Europe, the Middle East and commodity markets will unfold," Scotiabank economist Derek Holt said.
 
"The last thing you want to do is to signal hawkish expectations right now and look foolish three to six months down the road."
Economists also noted that Carney likely wanted to avoid giving any upward boost to the loonie by signalling bullish intentions.
 
Currency traders reacted to Carney's cold shower by shaving 0.37 of a cent from the loonie to 102.57 cents U.S.
It may also be that, like some private-sector economists, Carney is not yet a believer that the better economic performance of the past few months will hold up. While several forecasting houses have revised their outlook for this year, TD Bank chief economist Craig Alexander believes the quick start will yield to a steady slowdown as the year proceeds.
 
Economists mostly stuck to their predictions for when Carney will start hiking rates — ranging from May to the end of 2011.
The Bank of Canada's governing board is expected to send a clearer signal on April 13, when it next issues its quarterly outlook for Canada and the world. The stand-pat decision Tuesday was the fourth consecutive time Carney has kept short-term interest rates unchanged.
 
Last week, the C.D. Howe Institute panel on monetary policy recommended Carney start raising the rate to ward off future inflationary pressures. The bank did express concern about inflation but said so far it has shown up only outside of Canada's borders. In Canada, "underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy," it said.
 
The bank cited early evidence of a recovery in net exports and strong business investment as key drivers of the recovery. But it also cautioned that poor productivity and the strong loonie will act as anchors to export growth going forward.
 
"The export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance," it said.
Bank Of Canada

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