By Courtney Tower
OTTAWA (MNI) – The Bank of Canada continued to hold its policy interest rate at 1.0% Tuesday, as expected, although it’s reading of the Canadian, global and U.S. economies was far more positive than before.
The Bank in its scheduled announcement maintained the 1.0% target for the overnight rate for the fifth consecutive setting, and for the fifth time it cautioned: “Any further reduction in monetary policy would need to be carefully considered.”
Apart from continuing to give no hint of future rate hikes as the economy improves and inflationary pressures might build, the Bank in its brief statement gave a picture of a strengthening Canadian economy, global recovery “expected to continue at a steady pace,” and United States growth that is “solidifying.”
The BOC will expand upon its analysis of the Canadian and global economic outlooks Wednesday in a quarterly Monetary Policy Report, but the more bare-bones sketch on Tuesday is the most generally positive in many months.
The BOC admitted that its January projection of Canadian growth at 2.4% for 2011 has been well outstripped, and now projects it at 2.9% at an annual rate. It sees 2.6% growth for Canada in 2012.
And further, the Bank now sees the output gap reduced to zero, with the economy operating at full capacity, by mid-2012 instead of by the end of 2012 as it had earlier expected.
For Canada, the Bank said activity is “rebalancing toward business investment and net exports, and away from government and household expenditures.” It expects business investment to “rise rapidly.” Net exports, however, will be constrained “by ongoing competitiveness challenges” — BOC-speak for a poor productivity record. These chalenges are “reinforced by the recent strength of the Canadian dollar.”
Underlying inflation in Canada remains “subdued,” the Bank said, but temporary factors will boost total or headline inflation to a high 3% in the current second quarter, before it goes back to the 2% target by mid-2012. Core inflation, on which the Bank fixes for its policy (lately running at a very low 0.9%) will rise gradually to 2%.
Core inflation will perform as the Bank expects, “as excess supply in the economy is slowly absorbed, labor compensation stays modest, productivity recovers, and inflation expectations remain well-anchored.”
The Bank sees global economic recovery in Europe as “becoming more firmly entrenched.” U.S. growth will continue, although limited by consolidation of household and, ultimately, government balance sheets. Global inflationary pressures will rise and global financial conditions “remain very stimulative.”
** Market News International Ottawa **
