The Bank of Canada
announced this morning that it is holding its target for the overnight rate at
1 per cent. The Bank sees economic growth in Canada picking-up through
2013, as growth in exports and business investment offset a slowdown in
household spending and residential construction. On inflation, the Bank
noted that low core and total CPI inflation have been more subdued than the
Bank projected, owing to significant excess capacity in the economy. Given low
inflation and what the Bank terms a "constructive evolution of
imbalances" in the household sector (meaning a lower pace of debt
accumulation), the Bank has walked back its previous rate tightening bias
stating that, "current levels of monetary stimulus will likely remain
appropriate for a period of time, after which some modest withdrawal will
likely be required."
Weak economic
growth through the second half of last year will likely bleed into the first
half of 2013, which means a continuation of subdued inflation of just over 1
per cent. In fact, the outlook for growth and inflation is weak enough that, if
the Bank had not spent the last year voicing concern over the perilous state of
household finances, a 25 basis point cut in the Bank’s overnight target would
be increasingly likely. Instead, the Bank will put a future rate hike on
hold for the foreseeable future, with rates gradually increasing in 2014.
Copyright BCREA - reprinted with permission
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