The Bank of Canada’s outlook has brightened slightly, chasing from financial markets any notion that policy makers could seek new stimulus.
Meeting for a final time under Governor Mark Carney, the central bank’s top officials acknowledged Canada’s economy got off to a better start in 2013 than they thought it would.
That’s a switch, as the Bank of Canada’s tendency lately has been to overstate the economy’s strength.
In their decision Wednesday, policy makers also expressed greater confidence in the efficacy of Japan’s extraordinary efforts to end deflation, and surprising certainty that business investment finally will stop disappointing this year.
Canada’s dollar rose after the central bank released its latest policy statement Wednesday, climbing 0.4 of a cent to 96.6 cents U.S.
The Bank of Canada left its benchmark interest rate unchanged for a 32nd month. But the smattering of brighter notes in the text, and repeated guidance that policy makers are inclined to raise borrowing costs as soon as possible, appeared to dull the talk that Canada’s central bank was losing faith in its current course.
“Outgoing Governor Mark Carney’s last Bank of Canada meeting resulted in a policy position that took on a slightly more hawkish tone,” Adrian Miller, director of fixed income strategy at GMP Securities in New York, advised clients in a report on the Bank of Canada’s rate decision.
“Hawkish” is Wall Street jargon for communication that suggests a central bank is inclined to raise interest rates.
With the prospects for the global economy uncertain, some analysts have speculated that the Bank of Canada will be forced to adopt a neutral tone, and perhaps even a “dovish” one. The Organization for Economic Co-operation and Development predicted Wednesday the global economy will grow 3.1 per cent in 2013, less than the Paris-based group’s previous forecast and weak by historical standards.
Given Canada’s reliance on exports, Mr. Miller was expecting the Bank of Canada to drop its bias toward eventually raising borrowing costs, which could put downward pressure on the Canadian dollar by implying discomfort with Canada’s growth prospects. Mr. Miller has advised clients in recent weeks that they shouldn’t rule out the possibility of an interest-rate cut, as incoming governor Stephen Poloz could feel pressured to weaken the loonie to aid exporters.
The Bank of Canada hardly is enthusiastic about the state of the economy.
“Exports are expected to recover, but to be restrained by subdued foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar,” the statement said.
Inflation, central bankers noted, is “slightly weaker” than forecast, and China’s slowdown from years of double-digit economic growth is “weighing somewhat on global commodity prices.”
The Bank of Canada said the economy has evolved broadly as expected in April, when it predicted gross domestic product would grow only 1.5 per cent this year and 2.8 per cent in 2014.
Still, the subtle changes from the Bank of Canada’s last policy statement were more positive than negative.
The central bank acknowledged that recent data show its prediction for first-quarter growth at an annual rate of 1.5 per cent was too slow. The Bank of Canada didn’t release a new estimate, but economists say the figure will exceed 2 per cent when Statistics Canada publishes its estimate on Friday.
Policy makers also said Japan, the world’s third-largest economy, is “beginning to respond to significant policy stimulus,” a vote of confidence in the efforts of their counterparts at the Bank of Japan.
Canada’s central bankers also looked past recent evidence of lacklustre corporate profits, predicting business investment would grow “solidly” this year. That amounts to a bet the country’s cautious executives will be pulled off the sidelines by the promise of profits in an expanding U.S. economy, continued development of energy infrastructure, and cheap credit.