Bank of Canada keeps interest rate at 1%

Source: The Canadian Press

The Bank of Canada reversed course on its monetary policy Tuesday, keeping its benchmark interest rate at 1% in the face of a weakening economy.

The bank had increased short-term interest rates three consecutive occasions since June, but said Tuesday that was enough as it scaled back growth projections for the economy.

And the bank’s bleak new outlook for growth -- about half a percentage point lower for this year and next than it projected in July -- likely means it will stay on the sidelines for some time, economists said.

The reduced expectations, combined with China raising interest rates to slow down its torrid economy, sent the loonie tumbling almost two cents US.

In an unusually detailed and dour communique accompanying the rate announcement, the central bank’s governing council said it now expects the slow recovery from recession to be so protracted that it won’t be until 2012 before the economy returns to full capacity, a full year later than previously thought.

“The economic outlook for Canada has changed,” the bank’s senior officials wrote.

“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.”

TD Bank chief economist Craig Alexander said markets had been expecting the benchmark interest rate to hold at 1%, but not the central bank’s negative statement.

“I think the market is surprised by the extent of revisions in economic growth and the very sombre tone,” he said.

“I don’t think the bank of Canada is going to pause for only one meeting. I think the most likely scenario now is the Bank of Canada is going to be on the sidelines for at least until next March.”

Bank governor Mark Carney will want to see how much quantitative easing the U.S. will undertake, and how the U.S. economy fares, before resuming its tightening cycle, Alexander said.

Some economists say it could even be longer, and Brian Bethune of IHS Global Insight said the policy reversal raises questions about whether Carney jumped the gun over the summer in becoming the only G7 central banker to start removing monetary stimulus.

He noted that long term rates were falling, reflecting the weak economy, while Carney was raising short-term interest rates.

“It was an odd cocktail of policy,” he said. “The problem with that is that encourages hot money flows into Canada and pushed up the Canadian dollar, and all that does is hurt small business.”

In the revised forecast, the bank said Tuesday it now believes Canada ’s economy will likely grow about 3% this year instead of the 3.5% it had predicted in July -- and that’s all due to a faster-than-expected start to the year.

Next year will be even worse, with moderate growth of 2.3%, six-tenths of a point lower than previously projected.

It’s not until 2012 that the bank sees the economy gathering steam, but at 2.6%, that’s still far below Canada ’s historic growth levels during expansionary periods.

More surprising was how far the bank’s senior officers set back the time frame for the economy to return to normal, or full-capacity -- to the end of 2012 from the previously thought end of 2011.

“This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending,” they wrote.

The bank said with household debt so high, it expects Canadians will spend less on consumer goods and on homes, meaning the housing market is in for a protracted cooling-off period.

Given that Ottawa is phasing out fiscal stimulus in March and consumers don’t have the means to keep spending, the Canadian economy will need to depend on exports and business investments, two sectors that have been extremely weak over the past few years.

It warned that exports will be sensitive to currency movements, a reference to efforts by the U.S. to devalue their dollar and corresponding strength of the loonie.

For the rest of the world, the coming fight over currency exchange rates -- largely between China and the U.S. -- and unresolved global imbalances will result in a more “protracted and difficult recovery,” the bank said.

Currency manipulation has emerged as the most contentious issue at the upcoming G20 finance ministers meeting later this week and leaders summit in November, both in Korea, with the potential to split the group between advanced and emerging nations.

The U.S. recovery will be particularly weak, it noted, with the corresponding drag on Canadian exports south of the border.

Even growth rates in emerging economies are expected to ease, the bank wrote, as fiscal and monetary policies are tightened.

As for prices, the bank’s key focus, its best guess is that both total and underlying inflation won’t reach the bank’s 2% target until the end of 2012.

Bank of Canada to leave interest rates on hold

Economists at Toronto-Dominion Bank say they now expect the Bank of Canada to leave interest rates untouched until early next year.

In a research note, TD says that it believes that further interest rate hikes are off the table for now, and that, in particular, “a pause is by far the most likely outcome for the October 19th decision.”

TD gives three main reasons for its prediction: global conditions have become increasingly uncertain, and not a little gloomy; Canadian economic data has consistently disappointed, and suggests future subpar growth; and, communications from the Bank of Canada have been quite dovish lately.

“In the absence of a rate change, the Bank of Canada’s statement will be important, and should exude softness,” TD says. “Current economic conditions should be described in more negative terms, with global growth sputtering and recent Canadian growth disappointing expectations.”

TD expects the central bank to downgrade both its domestic and international forecasts, and predicts that the 2010 forecast will probably drop from 3.5% to about 3.0%. For 2011, the BoC has been forecasting a 2.9% gain, which TD expects to see downgraded, too.

“If it arrives around 2.5%, the collective downgrades will result in an output gap that remains far from closed at the end of 2011, and instead the BoC may project a return to full capacity around mid-2012, or even later,” TD says. “Given the substantial shift, we highlight the risk that the inflation forecast might be pitched downwards, too, with a later return to a sustainable 2% level.”

“Our medium term outlook remains for a Bank of Canada on hold through the end of the year and into early 2011. We then imagine a slow but steady pace of tightening that results in a 2.00% overnight rate at the end of 2011, and a 3.00% rate at the end of 2012,” TD concludes.

Lack of consumer activity holds housing market steady

Housing prices in the Edmonton area remained stable as we enter the final quarter of the year. Single family dwelling prices in September mirrored prices in August and condo prices rose slightly after four months of decline. Both listings and sales declined in September as compared to a month ago.


“The market seems to be resting,” said Larry Westergard, president of the REALTORS® Association of Edmonton. “After the turmoil of the past couple of years and the rush to buy in the early part of the year, it seems that consumers are just sitting back and waiting to see what comes up next.” There are still over 8,600 residential properties in the local inventory and buyers have lots of choice.

The average* price of a single family property was up $472 and sold for $370,653 in September. Condominiums, which have dropped in price for four consecutive months, rallied and sold on average for $238,822 last month. The slightly less than 1% price increase did not reverse drops from a high of $252,728 in April. The duplex/rowhouse average price was down 11% to $313,462 but tends to vary widely from month to month. The residential sale price (which includes all types of residential property) was $326,499; down less than a quarter of a percent from last month.

Residential sales in September were down from the previous month at 1,187 as were listings at 2,668. This sales-to-listing ratio was 47% and the average days-on-market was unchanged at 57 days.

“The third quarter activity was identical to the first quarter this year,” said Westergard. “Typically we see sales dropping from Q2 to Q3 but remaining higher than Q1. This reflects a very active market in the first part of the year which was spurred on by financial incentives and the threat of increasing interest rates.”