The Bank of Canada is setting aside worries over a housing bust to double down on a broader concern: the country's sputtering economy.
Canada's central bank surprised Bay Street and Wall Street Wednesday by dropping from its latest policy statement any hint that it would raise interest rates to deter Canadians from bidding up housing prices and adding to record levels of household debt.
Instead, policy makers, led by Governor Mark Carney, said higher interest rates now are "less imminent" because Canada's economy is expanding markedly slower than the central bank had forecast a few months ago. Exports and business investment aren't growing fast enough to make up for a fast-cooling housing market, the bank said.
"For the better part of two years, Mr. Carney and other central bank officials have warned of the danger of too much credit, and Mr. Flaherty has tightened mortgage rules four times."
The Bank of Canada, which sets rates with a goal to keep inflation advancing at a pace of about 2 per cent a year, said the economy likely won't grow fast enough to cause prices to exceed that target until the second half of 2014, later than previously thought. With housing prices in retreat, and household credit growth slowing to a pace roughly in line with income gains, there is little reason for the central bank to continue to emphasize the potential threat of a housing bust over the present danger of deteriorating economic growth.
They have been talking rate hikes for a long time, and the data really haven't been supportive of it," said Darcy Briggs, a portfolio manager at Franklin Templeton Investments' Bissett unit in Calgary. Noting that all other major central banks are actively trying to stimulate their economies, Mr. Briggs said the Bank of Canada's shift simply reflects a global economy that is struggling to gain momentum. "It's not as if the Canadian central bank can be an outlier forever," he said.
Before Wednesday's policy announcement, analysts were split on when the Bank of Canada would raise its benchmark lending rate, which policy makers left unchanged at 1 per cent, its setting for more than two years. That split no longer exists, as economists who were predicting higher borrowing costs by the end of the year moved to the camp that already believed sluggish economic growth would forestall an increase until early 2014.
While continuing to say that a "modest" withdrawal of monetary stimulus remains likely over time, policy makers concluded that 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 that previously anticipated." In December, the policy maker said future policy would be weighed against the "evolution of imbalances in the household sector," language that reflected the Bank of Canada's concern that some households had taken on too much debt to buy houses at record prices, risking a wave of defaults once borrowing costs return to more normal levels.
The shift in stance suggests Mr. Carney is satisfied that he and Finance Minister Jim Flaherty have successfully deflated the risk of a financial crisis. For the better part of two years, Mr. Carney and other central bank officials have warned of the danger of too much credit, and Mr. Flaherty has tightened mortgage rules four times. The federal banking regulator also made it less lucrative for lenders to dole out new home loans.
"What is not right for the Canadian economy as a whole is to lead with monetary policy, adjust interest rates solely to address issues in the mortgage market," Mr. Carney said at a press conference in Ottawa. "We are collectively managing the situation."
Housing starts have slowed to an annual rate of about 200,000 from 225,000; a rate that is closer to the 185,000 new homes the Bank of Canada believes the country needs each year to keep up with new household formation. Mr. Carney also noted that annual credit growth has slowed to 3 per cent from 10 per cent, a pace that is roughly in line with wage growth.
But a slower housing market is taking a toll on Canada's GDP. The Bank of Canada cut its forecast for economic growth in 2013 to 2 per cent from an October estimate of 2.3 per cent, and said gross domestic product likely expanded only 1.9 per cent in 2012, a slight downgrade that compares poorly against the 3-per-cent growth to which Canada had become accustomed before the financial crisis.
Canada's economy is struggling because it needs a new engine. Business investment is being restrained by uncertainty over the outlook for economic growth, and the stronger dollar is hurting exporters' ability to compete in global markets. The Bank of Canada said exports won't reach their pre-recession peak until the second half of 2014.
The Globe and Mail
Published Wednesday, Jan.23, 2013 10:09 AM EST