Bank of Canada holds key rate at 1%
OTTAWA — A slowing global economy fraught with currency risk has brought an abrupt end to the Bank of Canada's rate-hiking campaign — a pause that could last for up to a year, analysts say, and raise concerns that record levels of household debt might be allowed to balloon further.
As expected, the Bank of Canada, led by governor Mark Carney, said Tuesday it would keep its key interest rate unchanged, at one per cent, ending three consecutive hikes from record lows. What surprised observers, however, was the downbeat tone of its rate statement — which included significant downward revisions to its growth outlook, and pushing back the date, by a year, as to when economic slack is absorbed and inflation is expected to hit the central bank's preferred two per cent target.
"I was struck by how bearish the statement read," said Thorsten Koeppl, economics professor at Queen's University in Kingston, Ont. "They maybe got a little bit spooked by the United States."
U.S. economic growth has slowed and private-sector job creation is moving at a snail's pace, prompting the Federal Reserve to openly muse about another round of asset purchases to stoke the recovery.
The latest rate decision emphasized how the global recovery had entered a "new phase," in which high unemployment coupled with overstretched government and household balance sheets would slow down growth in advanced economies; and emerging markets would see growth ease to a more "sustainable" pace as authorities moved to tighten fiscal and monetary policy.
"The North American business cycle is a long way from normal and you have the added complication in Canada of an excessively high currency," said Brian Bethune, chief Canadian economist at IHS Global Insight. "This is a very tricky situation."
Bethune said the central bank failed to comprehend how influential some temporary factors — such as the introduction of the HST, which moved forward spending plans, and the Vancouver Olympics — were in terms of driving robust growth in the early stages of the recovery. Raising rates before the Fed and other big central banks gave the loonie a push upward and, he argued, that's now hurting Canadian small businesses in terms of selling goods abroad. Exacerbating matters on this front is the one-way global trade to sell the U.S. currency on the belief the Fed follows through on plans to inject more additional cash into its economy.
The Bank of Canada statement noted the economy would have to rely more on net exports to drive growth, given governments are winding down fiscal stimulus and overstretched households pare back spending.
"With the bank concerned now about the economy's increasing reliance on net exports, it will take particular care not to unnecessarily bolster the loonie through future rate hikes," said Michael Woolfok, managing director of BNY Mellon Global Markets.
The Canadian dollar fell by over two cents at one point following the statement's release before closing the session down 1.7 cents to 96.91 cents U.S..
Rate hikes may be on hold for up to year, according to Koeppl and other analysts, given the central bank's view that the output gap — which measures the amount of spare capacity in the economy — won't narrow until late 2012.
"You don't want to tie your hands in terms of keeping rates low because consumers will just borrow more and more, and maybe down the road you are really afraid of hiking interest rates and causing some bad downturn because consumers are then really overstretched," Koeppl said.
Benjamin Tal, deputy chief economist at CIBC World Markets, said the pace of borrowing among consumers has slowed from recent peaks, according to central bank data — perhaps offering Carney some comfort that households won't add to their debt load even though rates may stay at one per cent for the foreseeable future.
"This is a central bank that's telling you it doesn't know what's ahead — and when you don't know you don't take chances. So you don't raise rates prematurely, even despite some concern about household debt," Tal said.
OTTAWA — A slowing global economy fraught with currency risk has brought an abrupt end to the Bank of Canada's rate-hiking campaign — a pause that could last for up to a year, analysts say, and raise concerns that record levels of household debt might be allowed to balloon further.
As expected, the Bank of Canada, led by governor Mark Carney, said Tuesday it would keep its key interest rate unchanged, at one per cent, ending three consecutive hikes from record lows. What surprised observers, however, was the downbeat tone of its rate statement — which included significant downward revisions to its growth outlook, and pushing back the date, by a year, as to when economic slack is absorbed and inflation is expected to hit the central bank's preferred two per cent target.
"I was struck by how bearish the statement read," said Thorsten Koeppl, economics professor at Queen's University in Kingston, Ont. "They maybe got a little bit spooked by the United States."
U.S. economic growth has slowed and private-sector job creation is moving at a snail's pace, prompting the Federal Reserve to openly muse about another round of asset purchases to stoke the recovery.
The latest rate decision emphasized how the global recovery had entered a "new phase," in which high unemployment coupled with overstretched government and household balance sheets would slow down growth in advanced economies; and emerging markets would see growth ease to a more "sustainable" pace as authorities moved to tighten fiscal and monetary policy.
"The North American business cycle is a long way from normal and you have the added complication in Canada of an excessively high currency," said Brian Bethune, chief Canadian economist at IHS Global Insight. "This is a very tricky situation."
Bethune said the central bank failed to comprehend how influential some temporary factors — such as the introduction of the HST, which moved forward spending plans, and the Vancouver Olympics — were in terms of driving robust growth in the early stages of the recovery. Raising rates before the Fed and other big central banks gave the loonie a push upward and, he argued, that's now hurting Canadian small businesses in terms of selling goods abroad. Exacerbating matters on this front is the one-way global trade to sell the U.S. currency on the belief the Fed follows through on plans to inject more additional cash into its economy.
The Bank of Canada statement noted the economy would have to rely more on net exports to drive growth, given governments are winding down fiscal stimulus and overstretched households pare back spending.
"With the bank concerned now about the economy's increasing reliance on net exports, it will take particular care not to unnecessarily bolster the loonie through future rate hikes," said Michael Woolfok, managing director of BNY Mellon Global Markets.
The Canadian dollar fell by over two cents at one point following the statement's release before closing the session down 1.7 cents to 96.91 cents U.S..
Rate hikes may be on hold for up to year, according to Koeppl and other analysts, given the central bank's view that the output gap — which measures the amount of spare capacity in the economy — won't narrow until late 2012.
"You don't want to tie your hands in terms of keeping rates low because consumers will just borrow more and more, and maybe down the road you are really afraid of hiking interest rates and causing some bad downturn because consumers are then really overstretched," Koeppl said.
Benjamin Tal, deputy chief economist at CIBC World Markets, said the pace of borrowing among consumers has slowed from recent peaks, according to central bank data — perhaps offering Carney some comfort that households won't add to their debt load even though rates may stay at one per cent for the foreseeable future.
"This is a central bank that's telling you it doesn't know what's ahead — and when you don't know you don't take chances. So you don't raise rates prematurely, even despite some concern about household debt," Tal said.
