• The Bank of Canada left the overnight rate unchanged at 1.00% as expected and maintained its forward guidance that rates are likely to stay low for “a period of time” after which “some modest withdrawal of stimulus will likely be required.”
• Today’s statement was little changed from April. We expect the Bank will maintain the overnight rate at 1.0% for the remainder of 2013 and only start to reduce the amount of stimulus once the economy is growing fast enough to reduce the output gap and the inflation rate is approaching the 2% target. Our view remains that the Bank is likely to remain on hold until the second half of 2014.
At Governor Carney’s final meeting as head of the central bank, no changes were made to either the policy rate or the forward-looking guidance statement. The Bank held the overnight rate at 1.0% and maintained that the “considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”
Today’s statement on the current state of the world economy was in large part an echo of the April statement with the US economy characterized as growing “at a modest pace,” China’s growth rate “easing,” and Europe in recession. The Bank gave a nod to the slowing growth in China as having reduced commodity prices “somewhat.” Regarding Canada’s economy, the Bank acknowledged that the first quarter of 2013’s rebound now looks likely to have exceeded the forecast contained in the April Monetary Policy Report. This upward surprise to growth in the first quarter, however, was not sufficient to change the Bank’s forecast for growth for the year as a whole, as growth in 2013 is “expected to remain broadly in line with” the 1.5% projected in the April forecast update. The inflation outlook remains quiescent with both the headline and core measures expected to remain soft in the near term. The Bank still projects that the inflation rates will reach the 2% target by mid-2015.
We largely agree with the main thrust of the Bank’s assessment although our forecasts for real GDP growth in 2013 and 2014 stand above the Bank’s projections therein raising the prospect that the output gap will be eliminated earlier than in the Bank’s base case scenario. Having said that, the low levels of the headline and core inflation rates in April still support the view that the 2% target will not be reached until late 2014 or early 2015. This supports the case for the Bank to maintain the overnight rate at 1.0% to ensure that the growth momentum exhibited in the first quarter of 2013 continues to build. Additionally, the pressure for the Bank to raise interest rates in order to temper demand for credit has subsided because the growth in mortgage credit and other consumer loans in April 2013 was the slowest since 1996. Against this backdrop, we expect the Bank will maintain the current level of interest rates for the remainder of 2013 and only start to reduce the amount of stimulus once the economy is growing fast enough to reduce the output gap and that the inflation rate is approaching the 2% target. Our view remains that the Bank is likely to remain on hold until the second half of 2014.
The new Governor, Stephen Poloz, assumes leadership of the Bank of Canada next month, and markets will be watching his initial speech and press conference on June 19, 2013 for clues regarding his assessment of the current state of the economy as a guide to the likelihood that he will support maintaining the mild tightening bias that has been in place for more than the past year.
RBC