The Bank of Canada (BOC) held its target for the benchmark overnight rate steady at 1.0 percent, as expected, but said a tightening of its policy stance was less imminent than previously expected due to a more muted outlook for inflation and slower growth in household credit.
The BOC, which has maintained a tightening stance since last April, said the global economic outlook was slightly weaker than it expected in its October policy report and the economic slowdown in Canada in the second half of 2012 had been sharper than it had anticipated so the economy would first real full capacity in the second half of 2014, later than it previously forecast.
The BOC cut its forecast for economic growth this year to 2.0 percent, down from 2.3 percent in October, but raised its 2014 forecast to 2.7 percent from a previous 2.4 percent.
For 2012 the BOC now forecasts growth of only 1.9 percent, down from a previous forecast of 2.2 percent. In October, the BOC had forecast that Canada’s economy would return to full capacity by the end of 2013.
“While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent 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 BOC said.
The BOC’s less hawkish stance comes as a surprise to most economists who had expected the bank to maintain its tightening stance due to concern over high household debt with the ratio of household debt to income reaching a historic high of 163 percent in the third quarter.
Based on its previous tightening stance, economist had expected the BOC to start raising interest rates, steady since September 2010, late this year or early 2014.
Slower growth in the second half of last year was due to weaker business investment and exports and the bank said caution about high debt levels meant that households had begun to cut spending.
Business investment and exports are expected to rebound this year though the “persistent strength of the Canadian dollar” and a lower track for foreign demand will keep exports below their pre-recession peak until the second half of 2014, the BOC said.
Consumption is expected to grow moderately and residential investment to decline.
“The Bank expects the trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels,” the bank said.
Inflation has softened more than the BOC had expected and consumer prices are expected to remain around 1 percent in the near term before rising gradually to the bank’s 2 percent target in the second half of 2014.
Canada’s headline inflation rate eased to a new low for the year at 0.8 percent in November from October’s 1.2 percent and Gross Domestic Product expanded by only 0.1 percent in the third quarter from the second quarter for annual growth of 1.5 percent, down from 2.8 percent in the second quarter.