The Bank of Canada left its main interest rate untouched yesterday, maintaining a 1 percent overnight rate for the 13th consecutive review. While Governor Mark Carney painted a bright economic picture, rumblings of increased interest rates are becoming more and more prevalent.
Overall, the economic momentum in Canada is slightly firmer than the Bank expected back at the beginning of the year. The Bank has projected the Canadian economy to grow by 2.4 percent in both 2012 and 2013 before moderating to 2.2 percent in 2014. As such, the Bank anticipates that the economy will return to full capacity in the first half of 2013.
Rate Watch
Tuesday’s statement was vague about the timing, saying only that a potential rate increase would depend on “domestic and global economic developments.” However, Governor Carney’s statement clearly shows that ground work is in place in case the Canadian economy and the global outlook continues to improve. Even though the Bank cut the 2013 forecast by four tenths of a percentage point, the slack in the economy is anticipated to tighten up roughly six months earlier than anticipated. As such, if you’re planning to purchase a house sometime this summer, now would be a great time to apply for a best rate mortgage.
Inflation Improvements
Growth forecasts and an improved economy also caused the Bank to confirm recent hints that the outlook for inflation in Canada is “somewhat firmer” thanks to stronger recovery and ever increasing gasoline prices. After moderating this quarter, the Bank reported the total CPI inflation, along with core inflation, to be around 2 percent over the balance of the projection horizon. Inflation rates are expected to stay anchored as the growth of labour compensation remains moderate and the economy reaches its production potential.
Problems Here at Home
As always, policy makers made a point of mentioning the troubles of growing household debt, citing it as the biggest domestic economic risk. Furthermore, the strong Canadian dollar is making it difficult for Canadian exports to compete. While the central bank insists that private domestic demand will account for most, if not all of Canada’s growth over the next couple of years, experts remain confident that any tightening here at home will be gradual and cautious.
In Regards to Global Changes
Tuesday’s announcement made no specific reference to the ongoing European crisis, other than to say that Europe will “emerge slowly from recession in the second half of 2012” and to acknowledge that risks around this outlook remain high. The outlook for growth in the U.S. remains positive thanks to better labour-market and financial conditions.
Rising global oil prices are causing a great deal of tension however, as the Bank worries about the compensation received by Canadian producers. On Tuesday, the Bank stated that “if sustained, these oil price developments could dampen the improvements in economic momentum.” The Bank is expected to include an analysis in its forecast (to be released today) of how oil prices could potentially affect the Canadian economy.
The central bank will expand on yesterday’s announcement today with the release of a full forecast at 10:30 a.m. in Ottawa. Mr. Carney and Senior Deputy Governor Tiff Macklem will be on hand at the press conference. The next round of policy is slated to be released June 5.
The Mortgage Talk Blog will continue to follow this story later this week.