Economists are wondering whether the Bank of Canada will back even further away from interest rate hikes when policy makers meet this week.
Governor Mark Carney and his colleagues at the central bank had been saying that the next move in interest rates would be up, rather than down. They haven’t changed that, but they have changed their language, saying after their last meeting in late January that the need to boost rates was now “less imminent” given a tamer outlook for inflation and a move by consumers to get more of a handle on their personal debts. Since then, signals have been weak, both on the jobs and economic growth fronts.
The labour market stalled in December, and, on Friday, Statistics Canada reported that the economy expanded at an annual pace of just 0.6 per cent in the fourth quarter of the year. Observers expect a slow start this year, with the economy perking up in the second half. Statistics Canada also reported last week that a widely watched survey showed Canadian businesses plan to increase spending on machinery and equipment by just 1.7 per cent this year, a weak showing, particularly given that the Bank of Canada had expected support for the economy on that front.
“As a result, weaker-than-expected investment spending, along with weaker-than-expected growth and inflation numbers over the second half of 2012 and moderating household credit growth, supports our expectation that the bank will further water down its current tightening bias in next Wednesday’s … policy announcement,” said economist Nathan Janzen of Royal Bank of Canada.
The Bank of Canada is in no rush to raise its benchmark overnight from 1 per cent.
Some observers even wonder whether the central bank could cut rates in light of how the global malaise could affect Canadian exports.
“Although overnight interest rate expectations and two-year government bond yields have declined marginally over the past few days, we still think that market expectations of eventual rate hikes are over the top,” said David Madani of Capital Economics. “Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market's ruling out of interest rate cuts makes little sense.”