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Bank of Canada September Rate Announcement

The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply. Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated. The Bank expects that American household spending will be even more subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions. Fiscal stimulus in the United States will also soon turn into material fiscal drag. Acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could prompt more severe dislocations in global financial markets. Resolution of these strains will require additional significant initiatives by European authorities. Growth in emerging-market economies has been robust, although its rate and composition will be affected by weakness in major advanced economies. While commodity prices have declined owing to diminished global growth prospects, they remain relatively high.

Largely due to temporary factors, Canadian economic growth stalled in the second quarter. The Bank continues to expect that growth will resume in the second half of this year, led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth. The supply and price of credit to businesses and households remain very stimulative. However, financial conditions in Canada have tightened somewhat and could tighten further in the event that global financial conditions continue to deteriorate. Net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar.

Slower global economic momentum will dampen domestic resource utilization and inflationary pressures. The Bank expects total CPI inflation to continue to moderate as temporary factors, such as significantly higher food and energy prices, unwind. Core inflation is expected to remain well-contained as labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

Source: Bank of Canada

No Surprise with no change

It wasn’t too much of a concern as to whether they were going to change the rate, but more so what Carney said about the state of Canada’s economy, the global economy, and in turn, how we fit into the mix and how we’ll move forward.At the last meeting in July, everyone was pretty sure that the next time we heard an announcement from the Bank of Canada that we’d be talking rate changes.

How quickly things change. Not only did the central bank leave rates as-is, Carney’s tone was quite reserved, notable stating that the ‘need to withdraw monetary stimulus has diminished’ – basically saying that there’s no need to increase rates at this time.

The bank also highlighted the fact that global economy has deteriorated severely since July. US growth is expected to be nil, and they had zero net job gains last month.

But not only that, they need to add approximately 125,000 a month to keep pace with its population and increase worker participation rates.

In Europe, the sovereign debt crisis has gotten worse and volatility is a way of life there right now.

The Canadian economy also retracted during the second quarter, but this is seen as temporary since some of the contributing factors were the natural disasters in Japan and the wildfires and annual summer shut down for maintenance in the oil patches in Alberta. However, the Bank feels that we will rebound the rest of the year, although our strong dollar is providing some headwinds to our growth because export demand is down

.Even though the gloomy tone is due to the factors stated above, Carney didn’t mention if or how any monetary policy will change in the near future.

It appears that interest rates will remain low for the foreseeable future, barring any unexpected events.A common question asked by many is whether or not interest rates will be cut any further?Carney didn’t elaborate too much on cutting interest rates, probably due to the fact that things are expected to turn around in the last two quarters of the year, and with prolonged low rates, spending should remain stimulated.

However, if the US slips into another recession we may see rates drop further.

If all things play out as anticipated, we’ll most likely see rates stable at current levels until mid-2012, but again, the last time the Bank of Canada made an announcement everyone thought that rates were going to be on their way up this time around. Ultimately, all we can do is wait and see.

Source: Property Wire

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