Bloomberg News

Canada Keeps Policy Rate at 1% on Delayed Export Recovery (2)

September 04, 2013

Bank of Canada Governor Stephen Poloz kept his main interest rate unchanged and reiterated that current monetary policy remains appropriate as an expected rotation of demand to exports and investment is being delayed.

Policy makers kept the benchmark rate on overnight loans between commercial banks at 1 percent for the 24th consecutive meeting and said slack in the economy will start to disappear in 2014. The decision from Ottawa was forecast by all 22 economists in a Bloomberg News survey.

“A gradual normalization of policy interest rates” can be expected as inflation returns to target and excess capacity in the economy is used up, policy makers led Poloz, 57, said in a statement from Ottawa today, echoing the last decision.

Business spending and exports have slowed the expansion of the world’s 11th largest economy this year even with recent signs of stronger growth in the U.S. and Europe. Consumer spending has continued to lead growth after warnings from Poloz and Finance Minister Jim Flaherty about record debts taken on at low interest rates.

“The bank is becoming more entrenched on the sidelines even though they haven’t changed forward guidance,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by telephone from Toronto.

The Canadian dollar rose 0.5 percent to C$1.0478 per U.S. dollar at 11:38 a.m. in Toronto, the highest level in a week. One dollar buys 95.44 U.S. cents.

Yields Fall

Yields on shorter-term government bonds fell and longer-dated securities rose. The two-year bond yield declined 1 basis point to 1.21 percent, and 10-year debt rose 1 point to 2.68 percent.

“Uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment,” the bank said.

The central bank’s last quarterly business survey showed 35 percent of executives planned more spending on machinery and equipment while 26 percent were cutting back. It was the third lowest balance of opinion since the country exited recession in 2009.

Teck Resources Ltd. (TCK/B), Canada’s second-largest mining company, said in July it would delay a copper project in Chile and the start of production at a coal mine in British Columbia after a decline in commodity prices.

‘Subdued’ Inflation

The bank also said that “significant slack” remains in the economy, inflation “remains subdued” and a “constructive evolution of household imbalances” is continuing, citing slower growth of household debt and higher mortgage rates.

“The economy is so weak that rate hikes aren’t warranted until 2015,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal. The rotation to business investment “is going to be delayed for a while” and third-quarter growth will fall short of the bank’s 3.8 percent forecast, he said.

Consumer prices advanced 1.3 percent in July, the 15th straight month the rate was slower than the bank’s 2 percent target. Output growth slowed to a 1.7 percent annualized pace in the second quarter, including a monthly decline of 0.5 percent in June that was the biggest since the 2009 recession.

Today Statistics Canada said that the country’s trade deficit widened to C$931 million in July, more than the most pessimistic forecast in a Bloomberg Survey, as exports to the European Union fell to the lowest since 2010.

Canada’s economic rotation is under way and will benefit from improving U.S. demand, Bank of Montreal Chief Executive Officer William Downe said at the Scotiabank Financial Summit in Toronto.

Weak Resources

“While we have recently seen a weakening in natural resources reflected in the exchange rate, this sector is cyclical by nature, and it will recover,” he said. “In the meantime, other areas of the economy are picking up the slack.”

The central bank said today the level of output in Canada’s economy is about what policy makers had forecast in July. The global economy is also progressing about as expected, the bank said, adding that “its dynamic has moderated.”

The U.S. economy has “slightly less momentum overall than anticipated,” the bank said, while the prospect of recoveries in Europe and Japan “remains promising.” In some emerging markets, “financial volatility has increased, adding uncertainty to growth prospects.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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