OTTAWA (Reuters) - The Bank of Canada held its benchmark interest rate at 1 percent on Wednesday but it revised its projections dramatically and said that excess capacity in the economy, soft inflation and stabilizing household debt have combined to make any rate hike further away than previously thought.
Governor Mark Carney has been the most hawkish central banker in the Group of Seven (G7) major industrial economies for several months but he has steadily been watering down his guidance on the need to start raising rates.
"While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 percent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated," the bank said on Wednesday.
By comparison, in October and December it said: "Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent inflation target."
Carney, who is set to become Bank of England governor in July, steered the Bank of Canada to be the first in the G7 to raise rates following the global financial crisis as the economy quickly recovered from a mild recession. He has refrained from further tightening since mid-2010, the longest pause since the early 1950s, but began signaling last April the need to start raising rates eventually.
"The Bank of Canada has made (policy) about as soft as they could, while still maintaining that tightening bias," said Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets.
Canadian primary securities dealers surveyed by Reuters last week unanimously expected the bank to hold rates steady and predicted a first hike in the fourth quarter of this year.
In a clear signal that rate hikes are still on the table, however, the bank said its projections included a gradual reduction in monetary stimulus between now and the end of 2014.
The bank now does not expect the economy to hit full capacity until the second half of 2014, not the end of 2013 as it forecast in its October Monetary Policy Report.
This is causing a substantially lower inflation profile. Total inflation is expected in the near term to remain around 1 percent, the bottom of the bank's target range of 1 to 3 percent. For the first time since 2009, the bank projects inflation to be below that band in the first quarter. It said total and core inflation should return to its 2 percent target in the second half of next year, not the end of this year as it once thought.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the announcement traders saw less than a 25 percent chance of a rate hike in late 2013.
The Canadian dollar fell below parity with the U.S. dollar after the bank's statement, dropping to C$1.0005, or 99.95 U.S. cents, from around C$0.9930, or $1.0070, immediately before the statement. It was the weakest level for the currency since November 19.
The bank said the economy likely grew by only 1 percent, annualized, in the fourth quarter of last year versus initial expectations of 2.5 percent growth.
It also forecast a weak start to 2013 but said growth will gather momentum throughout the year as business investment and exports strengthen and temporary energy sector disruptions end. Annual growth in 2013 should be 1.9 percent, compared with the previous 2.2 percent forecast, it said.
The detailed new projections, released alongside the interest rate decision for the first time, were largely in line with market expectations of a weaker growth and inflation profile.
Dizzying household credit growth and a hot housing market have been a top concern of both Carney and Finance Minister Jim Flaherty but the bank's language on Wednesday signaled the belief that the situation was getting under control.
The bank expects household credit growth to moderate further and the debt-to-income ratio to stabilize near current levels. It painted a mixed picture of the housing market itself, with residential investment seen declining from historically high levels but home building still higher than demographic demand.
"Ongoing strong rates of construction, particularly of multiple-unit dwellings in some regions, continue to point to overbuilding. Despite some softening in house prices, valuations in some segments of the housing market remain stretched," it said.
(Editing by Grant McCool; and Peter Galloway)
Source: http://news.yahoo.com/bank-canada-delays-rate-hike-due-weak-growth-151408217--sector.html
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