The Bank of Canada left its target for the overnight rate unchanged at 1 per cent this morning. In its accompanying statement, the Bank highlighted that uncertain global and domestic conditions are delaying a forecast pick-up in exports and business investment, leaving the level of economic activity lower than what the Bank had been expecting. The Bank is forecasting growth of 1.6 per cent in 2013, and has trimmed its outlook on growth in 2014 from 2.6 per cent to 2.3 per cent. Interestingly, the Bank also noted that persistently below target inflation are of increasing importance, normally an argument for a cut in the overnight rate. However, the risk of exacerbating already elevated household debt is weighing heavily on the Bank's interest rate decisions.
Low inflation, higher long-term interest rates and the Bank's downward revisions to its economic forecast virtually rule out any movement in the overnight rate in the short term. Like the Bank, we anticipate a rebound in economic growth in 2014 that will bump inflation back onto a path back to its 2 per cent target by 2015. Rising inflation will likely necessitate a tightening of interest rates, but not until late next year at the earliest.
Copyright BCREA - reprinted with permission
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