Interest rate held in check
By Julian Beltrame OTTAWA — Canada’s economy is taking a battering from the high dollar combined with low productivity and still needs the stimulus of low interest rates, the Bank of Canada says.
In a previously telegraphed move, the central bank announced Tuesday it will keep its trendsetting interest rate at one per cent until next year — and likely much longer.
But analysts focused on the accompanying statement from governor Mark Carney, which conceded that both the Canadian and global recoveries are struggling under stiffening headwinds of risk, as a signal of future intentions.
“The global economic recovery is proceeding largely as expected, although risks have increased,” the statement said, citing renewed concerns that European debt woes will spill into global financial markets.
The bank said demand in the U.S., Canada’s largest export market, remains weak, and even generally robust emerging markets such as China and India are seeing a deceleration of economic activity.
“The recovery in Canada, in the second half of 2010, appears slightly weaker than the bank projected” largely as a result of falling exports, it added.
“This underlines a previously identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.”
Statistics Canada reported two weeks ago that the third-quarter current account deficit had hit a record $17.5 billion, with net trade slicing 3.5 percentage points off gross domestic product growth. The strong currency contributes to the deficit in two ways — by making Canadian exports more expensive in foreign markets, and foreign imports less expensive for Canadians.
TD Bank economist Diana Petramala said the cautionary tone of the bank statement likely means it won’t act on interest rates until at least next July.
“At this juncture in time, hiking too soon can be more detrimental to the Canadian economy than keeping rates stimulative for a longer period of time,” she said.
Carney has long expressed concerns about an extended period of super-low interest rates, fearing they could lead to inflation and irresponsible borrowing by consumers, such as occurred in the U.S. following the recession.
But with the U.S. Federal Reserve keeping rates effectively at zero, and in the middle of a second round of quantitative easing that deflates the U.S. dollar, increasing the rate spread between the two countries risks boosting the loonie to even higher altitudes.
The bank had expected the second half of 2010 to be weaker than the first, but nothing like what has come to pass.
After a torrid start to the year that appeared to convince Carney the recovery was well-entrenched — at least enough to hike rates three times over the summer — the last two quarters have sowed doubts.
The first quarter’s 5.6 per cent advance was followed by a cold-shower 2.3 per cent in the second quarter, and a further wake-up call in the third, when growth braked to one per cent. All were lower than the bank had expected.
Meanwhile, Canada’s robust labour market has similarly fizzled — with no appreciable gain in employment since June.
Economists have said most of the problems emanate from the U.S., particularly that country’s weak housing and auto markets, which cut into Canadian exports.
There was some good news on that front Monday with an agreement between President Barack Obama and the Republican Congress to extend Bush-era tax cuts another two years.
In a conference call Tuesday morning, Scotiabank economists predicted next year’s growth in North America, Europe and Japan will be slower than this year’s, although they added a double-dip recession was unlikely.
“The lengthy process of bringing outsized fiscal deficits under control, withdrawing unprecedented monetary stimulus and restructuring the global financial system will impede growth prospects in many countries through mid-decade,” said chief economist Warren Jestin.
The third quarter did see business investment pick up and a better-than-expected bump from consumer spending, but not enough to offset the exports hit, the Bank of Canada said.
Although the bank seldom offers clear guidance on future direction of monetary policy, it noted that “any further reduction in monetary stimulus would need to be carefully considered.”
The statement accompanying the interest rate decision was shorter than normal, suggesting Carney may be preparing for another downward revision on his projections for the economy on Jan. 18, the next scheduled policy announcement date.
The Canadian Press http://news.therecord.com/Business/article/826512