Julian Beltrame
Other
OTTAWA – The Bank of Canada is hinting that it will need to keep interest rates super low for an extended period to stimulate an economy being battered by a sharp global downturn and rising risks.
As expected, the central bank left its target overnight rate at one per cent for the ninth decision date in a row on Tuesday.
But, in an pessimistic new forecast of future expectations, it gave every indication that Canadians can bank on lending conditions staying “stimulative” well into the future.
For Canada, the bank slashed its forecast for growth this year and next year by 0.7 percentage points to 2.1 and 1.9 respectively.
The United States, China and emerging countries will also grow slower than previously thought, while Europe will fall into a “brief” recession, the bank added. That’s the most likely scenario, but it could be worse, the bank adds.
“The bank’s base-case scenario assumes that the euro-area crisis will be contained, although this assumption is clearly subject to downside risks,” the bank said.
That was more likely Tuesday with news out of Europe that the long-anticipated rescue of its banking sector is far from settled and speculation that the government of Silvio Berlusconi of Italy could fall in squabbling factions over emergency restraint measures.
The Canadian dollar dropped immediately after the central bank’s statement was released at 9 a.m. ET and kept going down as markets reacted to the pessimistic tone of the message. The dollar, which had briefly breached parity, was down 1.17 cents at 98.52 US in midday trading.
Bank of Montreal economist Michael Gregory said the central bank’s dropping of a long-standing caution about interest rates eventually needing to rise constituted a strong message to markets.
“The mere fact of going from this slight, vague hint of eventually tightening down the road to, ‘Hey guys, we are doing absolutely nothing for a long time,’ you necessarily then at the margin raise the risk that in the interim rates could actually fall,” he said.
Scotiabank and TD Bank economists don’t see a rate cut in the offing, but said they believe the central bank is preparing to stay on the sidelines well into 2013.
For investors, the message not to expect “meaningful changes in interests rates” for several years and that cash is king, said Denis Senecal of State Street Global Advisors in Montreal.
He added that the risk is for even lower interest rates and possibly a bout of deflation.
While the rate decision was no surprise, the tone of the bank’s unusually long accompanying statement was darker than some had expected, even though economists had been calling on bank governor Mark Carney to sharply revise the summer’s sunnier economic forecast.
The bank’s policy team took the advice to heart. Not only is growth braking dramatically in the industrialized world, even China and other emerging countries can be expected to lower their sights in the near future. And of course, Europe will most likely now experience a recession, it said.
“The global economy has slowed markedly as several downside risks… have been realized,” the bank said.
“The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies. The bank now expects the euro area … will experience a brief recession.”
Canada‘s economy is currently feeling the impact of Europe, the U.S. and slower growth in the emerging countries.
“Although Canadian growth rebounded in the third quarter (which ended Sept. 30) with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year,” the bank said.
The bank delayed it’s expectation for a return to normal growth from mid-2012 to the end of 2013. That’s more than four years after the official end of the 2008-09 recession.
Low foreign demand for Canada’s exports, a high dollar, falling commodity prices, skittish markets and a more cautious consumer were among the reasons cited.
Given the underutilization of the economy’s capacity and weakness abroad, the Bank of Canada was not particularly worried about inflation, despite a report last Friday showing consumer prices rose 3.2 per cent in September — above the bank’s range — and that underlying inflationary pressures continue to rise.
The bank said it expects consumer price increases will soon start slowing and bottom out at around one per cent next summer before trending upwards toward the bank’s two per cent target at the end of 2013.
That would suggest the bank might be thinking of cutting the overnight rate before raising it, but the bank statement suggests it was comfortable with where it is for now.
As you know, your variable rate mortgage, lines of credit and/or student loans are all based on the Prime Rate and as promised, here is your personal update from me on the recent Bank of Canada announcement on changes to their Overnight Rate which in most cases impacts your Prime Rate.
At 9:00 am EST, October 25th, 2011, the Bank of Canada did what we expected them to do… they maintained their overnight rate. What this means to you is that the prime rate on your mortgage or line of credit will not change and remains at 3.00%. This is great news as you still have a great low rate and so continue to make the most of the low payments you will still have and maybe chat with a financial advisor about a Tax Free Savings Account or some RRSP contributions to trigger a potential income tax refund next year! If you don’t have a financial advisor, let me know and I’d be happy to recommend one to you.
Here is an excerpt of the announcement from the Bank of Canada and what they had to say about their decision:
“The global economy has slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report have been realized. Financial market volatility has increased and there has been a generalized retrenchment from risk-taking across global markets. The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels. Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year.”
The outlook has not changed since the last announcement…. the Canadian economic growth stalled in the second quarter but the Bank continues to expect that growth will resume in the later part of this year. Based on this repeated message and economic conditions it is anticipated that prime rate might not actually increase until well into 2012 maybe even 2013. When it does start to increase, it is expected to be gradual and controlled in line with economic recovery, both in Canada and globally. Remember any change to the prime rate since 1992 has only been by 0.25% at any ONE time.