03 Dec

Canada holds rate, sees sign of “broadening recovery”

December 3, 2014

By CentralBankNews.info
    Canada’s central bank held its benchmark target for the overnight rate steady at 1.0 percent, as widely expected, but voiced growing confidence about the economy, saying it was “showing signs of a broadening recovery,” suggesting that “the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun.”
    The Bank of Canada (BOC), which has maintained its policy rate since 2010, also said that its current policy stance was appropriate in light of the balance of risks, a statement that is similar to October’s assessment that the risks to the inflation projection were roughly balanced.
    In October the BOC adopted a new policy with regard to its outlook for policy rates, foregoing a specific guidance in favor of detailing the risks that it sees.
    A more upbeat view of the outlook was based on rising exports, that are being reflected in increased business investment and employment, while inflation has also risen more than expected.
    “The net effect of these recent developments … is that the output gap appears to be smaller than the Bank had projected in the October Monetary Policy Report,” the BOC said, adding that unemployment still indicates significant slack in the economy but household imbalances continue to present a significant risk to financial stability.
    Economists expect the BOC to raise rates in the fourth quarter of 2015 but last month the Organization for Economic Co-operation and Development (OECD) forecast that it would start raising rates in late May 2015.

    In its October policy report, the BOC predicted economic growth would average some 2.5 percent in 2015 before slowing to around 2.0 percent by the end of 2016.
    Canada’s headline inflation rate rose to 2.4 percent in October from 2.0 percent while unemployment fell to 6.5 percent, the lowest rate since November 2008.
    Canada’s Gross Domestic Product expanded by 0.7 percent in the third quarter from the second quarter for annual growth of 2.59 percent, marginally faster than the 2.54 percent growth rate seen in the second quarter.

    The Bank of Canada issued the following statement:

“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 has risen by more than expected. The increase in inflation over the past year is largely due to the temporary effects of a lower Canadian dollar and some sector-specific factors, notably telecommunications and meat prices. Underlying inflation has edged up but remains below 2 per cent.
The U.S. economy has clearly strengthened, particularly business investment, which has benefitted Canada’s exports. Growth in the rest of the world, in contrast, continues to disappoint, leading authorities in some regions to deploy further policy stimulus. Oil prices have continued to fall, due to both supply and demand developments. In this context, global financial conditions have eased further.
Canada’s economy is showing signs of a broadening recovery. Stronger exports are beginning to be reflected in increased business investment and employment. This suggests that the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun. However, the lower profile for oil and certain other commodity prices will weigh on the Canadian economy.
The net effect of these recent developments, together with upward revisions to historical data, is that the output gap appears to be smaller than the Bank had projected in the October Monetary Policy Report (MPR). However, the labour market continues to indicate significant slack in the economy.
While inflation is at a higher starting point relative to the October MPR, weaker oil prices pose an important downside risk to the inflation profile. This is tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures. Household imbalances, meanwhile, present a significant risk to financial stability. Overall, the balance of risks remains 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.”
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