The economy grew at the fastest pace in more than a decade between January and March, but will slow between now and 2012 as the housing market cools, the dollar trades near parity and the impact of government stimulus spending fades in Canada and the United States, the Bank of Canada said in its latest forecast.
The central bank’s projections come two days after Governor Mark Carney kept his benchmark lending rate at an historic low of 0.25 per cent but, citing hotter-than-anticipated core inflation and ``front-loaded” growth, hinted he could start raising borrowing costs as soon as his next policy decision on June 1.
At a news conference after releasing his April Monetary Policy report, Mr. Carney said he decided to remove a year-old ``conditional commitment’’ to keep rates on hold through mid-2010, depending on the outlook for inflation because it was no longer ``appropriate.’’ Still, he emphasized that the ``extent and timing’’ of rate increases will depend on how growth and inflation play out in the coming months.
``The Canadian economy has strengthened, we have marked up our forecasts, we’ve taken appropriate steps, we think, in adjusting our policy stance,’’ Mr. Carney told reporters in Ottawa. ``But I would underscore, what is clear in the report, is there are considerable risks around the economic outlook.’’
Indeed, the currency’s strength will help restrain inflation and, once government stimulus spending ends, growth going forward will increasingly depend on the private sector achieving gains in productivity, Mr. Carney said, hinting at a cautious road back to more normal borrowing costs.
Stewart Hall, an economist with HSBC Securities in Toronto, said the central bank’s report ``largely reinforces our opinion that the rate cycle will be conducted in a measured fashion which we would define as rate adjustments in 25-(basis point) packets.’’
Nonetheless, economists said the first of those increases would likely come in June and the loonie traded near a 22-month high after the report came out.
Gross domestic product expanded at a 5.8 per cent annual rate in the first quarter – the most since the fourth quarter of 1999 – the central bank said, significantly revising its 3.5 per cent forecast from January. However, the economy will slow to a 3.8 per cent pace of growth in the current quarter, 3.5 per cent from July to October, 3.5 per cent in the fourth quarter and 3.3 per cent in the first three months of 2011, slowing in the second half of that year to 1.9 per cent and staying at that pace through the end of 2012.
The central bank said inflation risks are ``roughly balanced’’ as opposed to its previous characterization of ``tilted slightly to the downside.’’
Policy makers attributed the ``firmer than projected” performance of their preferred inflation gauge – which came in just above the 2 per cent target in February – to temporary factors such as hotel prices for the Winter Olympics in Vancouver. Still, though core inflation in the first half of this year will ease in the second half of 2010 and the first half of 2011, it will then accelerate and be close to or at 2 per cent until the end of 2012. The total inflation rate will reach 2.4 per cent in the second half of this year and average 2 per cent or higher through the end of 2012, the bank said.
That’s in part because the reliably low cost of mortgages and other loans spurred more borrowing and spending than expected, policy makers said.
``With the higher amount of expenditures brought forward resulting in somewhat smaller excess supply, as well as a more gradual deceleration in wages than previously anticipated, inflationary pressures are slightly more pronounced than expected,” the central bank said in its report.
The next inflation report from Statistics Canada is on Friday.
