Economic recovery now expected to be slower than earlier forecast
The Bank of Canada says it doesn’t rule out interest rate increases in the future, but adds they would need to be “carefully considered.”
Mark Carney, governor of the Bank of Canada, leaves after holding a press conference on the bank’s October monetary policy report at the National Press Theatre in Ottawa Wednesday.(Sean Kilpatrick/Canadian Press)
“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” the central bank said in its latest monetary policy report, on Wednesday.
The bank said the economic outlook for Canada has changed since its last outlook.
The bank now expects the economic recovery to be more gradual than it had projected in its July report, with growth of 3.0 per cent in 2010. Its previous report called for 3.5 per cent growth.
The bank reduced its forecast for growth in 2011 to 2.3 per cent in 2011, down from 2.9.
“This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending,” the report said.
The bank also pushed out until later into the future its estimate for when the economy would return to full capacity. It now expects that by the end of 2012, rather than the beginning of that year as it had predicted in July.
It also extended by a year its prediction for when inflation would reach two per cent, to the end of 2012.
The central bank on Tuesday kept its overnight interest rate unchanged after raising it to one per cent over the course of its last three meetings.
In its October monetary report, the bank said, “This leaves considerable monetary stimulus in place.”
‘Slowest recovery on record’
Diana Petramala, an economist with TD Economics, said the bank’s outlook “represents the slowest recovery on record for the Canadian economy,” justifying low rates through 2011.
Petramala predicted in a commentary that the bank would keep rates on hold until March of 2011, then raise them gradually through 2011 and 2012, “bringing the overnight rate to two per cent and three per cent at the end of each respective year.”
The bank also renewed its concern about the issue of Canadians’ growing household debt as both a risk to the recovery and a drag on increased consumer spending.
At a news conference, bank governor Mark Carney raised the prospect of further regulatory changes by governments to discourage Canadians from taking on too much debt. In February, the federal government had introduced rules to tighten mortgage lending.
Carney said that while responsibility for not taking on more debt than they can handle begins with Canadians themselves, “authorities, broadly speaking, have to be vigilant.”
Banks and other lenders must ensure “that the debts their clients are taking on can be serviced in the fullness of time,” Carney added.
The bank also warned of the potential hazards if countries try to weaken their currencies in order to protect their export markets.
“Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery.”