The Bank of Canada is widely expected to maintain its policy interest rate at 1.0% at its next announcement Tuesday, influenced more by global uncertainties than by Canadian inflation or other economic concerns.
Financial markets have priced in almost no chance of an increase in the BOC’s overnight rate, as have financial commentators. They used to think, when global demand and prices ran high and emerging market economies boomed, that the BOC would hike the rate on April 12. It did not and predictions moved to next Tuesday, but then again to July 19, on slowing performances abroad, in the U. S., and in Canada.
Now, many are thinking of September 7 and some of October 25, as when the BOC will raise the rate from where it has sat since September 8, 2010.
Global concerns, rather than the Canadian economy itself, are generally considered to be the main BOC reason for standing pat, although some private economists and the Organization for Economic Cooperation and
Development think more attention should be paid now to domestic inflation. Seven of the 12 prominent economists voting for a leading Canadian economic think tank urged a hike of 25 basis points Tuesday and all thought it had to do so “before long.”
The Bank states that inflation in Canada is well anchored, although the headline number is high currently at 3.3%, well above the effective 2% target. Core, on which the BOC relies strongly, is at 1.6%.
Inflation is the Bank’s sole mandated concern, but of course that is part of an overall economy which showed strong growth in the 4th quarter last year (3.3%) and likely in the 1st quarter this year. The consensus is for 4.0% Q1 GDP growth – some say up to 4.7% – when Statistics Canada reports Monday; BOC has said +4.2%. This growth is expected to slow markedly in the rest of this year, to 2.8% at an annual rate in the second quarter, according to Dawn Desjardins of RBC Economics.
Recent indicators show that manufacturing, wholesale trade, and activity in the house market were solid in March, while limited data for April show moderate declines in housing starts and sales but a strong increase in employment.
There is expected to be a substantial decrease in manufacturing because of Japanese earthquake/nuclear plant supply disruptions, temporarily for Q2 but catching up by Q3. The BOC projects overall growth for the full year in Canada to be 2.9%, and 2.6% in 2012, with which few analysts disagree by very much.
The global scene is the more important now, as the drivers of growth in Canada are shifting from the consumer and federal stimuli to exports and business investment, both dependent on the United States and the world.
For the United States, despite the surges in exporting overall, economic indicators have been disappointing and point to continuing struggle, analysts say. Moreover, the upshot in Congressional debate over the United States’ huge debt, leaves TD Economics with a generally-accepted observation: “the road to repair is long and the emergent risk of an additional drag from the fiscal outlook looms large.”
Moreover, the Federal Reserve continues its high-stimulus policy with no sign of that reducing by very much very soon. That in itself offers “only very limited scope for Canadian rate hikes without risking another spike in the loonie (the C$),” according to Douglas Porter of BMO Capital Markets. The BOC constantly speaks of the high C$ as one important brake on GDP performance.
The U. S.