The Bank of Canada is getting a little more optimistic about the prospects for the domestic and global economies, although it is far from ready to start raising interest rates in the expectation of strong growth.
As widely predicted, bank governor Mark Carney and his policy-setting team kept the trendsetting interest rate at the highly stimulative one per cent for the 12th consecutive date on Thursday.
Markets and financial institutions were so confident of the decision that the day before that the Bank of Montreal felt no compunction in announcing it will drop its promotional five-year mortgage rate half a point to 2.99%, likely touching off another mortgage fight among major lenders.
The good news in the statement released with the decision, however, is that the bank policy team no longer sees the ominous dark clouds threatening the global recovery it had warned about in its last review in January.
“The heightened uncertainty around the global economic outlook has decreased in the weeks since (January) … with tentative signs of stabilization in European bank funding and sovereign debt markets,” it said in an unusually fulsome statement.
As well, global financial markets have improved and risk aversion eased, while the U.S. expansion is “proceeding at a modest pace,” reinforced by stronger employment gains.
Canada too has seen conditions brighten somewhat, the bank predicting the economy is growing faster in the first three months of this year than in its previous call for a 1.8% advance.
The revision comes after Statistics Canada last week upgraded third-quarter growth to a robust 4.2% – seven-tenths higher than previously reported – and calculated December’s hand-off to the new year was relatively strong.
Not that Carney doesn’t still see risks. Despite improvements, the global economy is still limping and likely will grow below the trend rate, China’s growth is moderating and commodity prices, particularly for oil, are elevated due to stronger demand but also Middle East political instability.
“If sustained, the later (oil prices) could ultimately dampen the improvement in global economic momentum,” the bank warned.
For Canada, Carney said the No. 1 risk continues to be household debt, which currently stands at a record 153% of disposable annual income.
Some economists had expected the revisions might push the Bank of Canada to revise its call for the economy to return to normal by two or three quarters to the beginning of 2013, but the policy team made no mention of the output gap in its statement.
Instead, the central bank said it believes much of the improvement in Canada has been of a temporary nature, suggesting it hasn’t changed its mind that economic growth in 2012 will continue to slow to about 2%, from last year’s 2.5% gain.
“Although the economy will likely grow faster than forecast in the first quarter due to temporary factors, underlying economic momentum remains around trend, balancing domestic strength and external weakness,” the bank reported.
Still, it said private demand is expected to be slightly stronger, consumer spending will remain high as households add to their debt burdens and net exports will be stronger too, if still modest.
As a result of reduced economic slack and higher oil prices, the bank said inflation will likely be higher this year as well, averaging about 2%.
“Reflecting all of these factors, the bank has decided to maintain the target for the overnight rate at one per cent,” it stated. “With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada.”