The Bank of Canadaraised its benchmark interest rate for the
first time since 2007, saying inflation is unfolding as expected and that
spillover from the European debt crisis has been limited, while stressing there
remains “considerable uncertainty” about an “increasingly uneven” global
recovery.
With his much anticipated decision to lift the
central bank’s overnight rate by one-quarter of a percentage point to 0.5 per
cent after more than a year at a record low level, Governor Mark Carney has
become the first central banker in the Group of Seven to tighten since the
financial crisis and recession began in 2008.
In a statement on the move, however, Mr. Carney and
his rate-setting panel sought to emphasize that investors should not
necessarily interpret the increase as the first in an uninterrupted series.
“This
decision still leaves considerable monetary stimulus in place, consistent with
achieving the 2 per cent inflation target in light of the significant excess
supply in Canada, the strength of domestic spending and the uneven global
recovery,” the central bank said Tuesday. “Given the considerable uncertainty
surrounding the outlook, any further reduction of monetary stimulus would have
to be weighed carefully against domestic and global economic developments.”
Economists interpreted the Bank of Canada’s
statement as a bucket of cold water on any remaining expectations for an
aggressive tightening campaign, as policy makers nervously monitor economic and
financial-market developments in the weeks leading up to their next decision on
July 20.
“Those looking for a clear roadmap (or GPS) for the
Bank’s tightening path will be sorely disappointed by today’s cautious
statement,’’ said Doug Porter, deputy chief economist at BMO Nesbitt Burns in
Toronto. ``The Bank has left its options wide open even on the July rate
decision.’’
Markets clearly took the same message, with bond
yields dropping and the Canadian dollar slipping after the decision,
“definitely not standard fare for a rate hike day,” Mr. Porter noted.
The loonie fell 0.8 per cent against the U.S.
dollar as of 9:45 a.m. in Toronto,
while the yield on two-year Canadian government bonds retreated to 1.71 per
cent from yesterday’s 1.82 per cent.
Eric Lascelles, chief macro strategist with TD Securities,
said while he expects a second straight 25-basis-point increase on July 20,
“barring significant negative developments either domestically or globally,”
further moves won’t be any bigger.
“What is clear is that despite the ultra-low level
of the overnight rate, the present environment is not one conducive to outsized
rate hikes of the 50-basis-point or larger variety,” Mr. Lascelles said.
The central bank’s statement touched on themes that
will no doubt be front-and-centre at the Group of 20 leaders’ meeting in Toronto at the end of
June, where Canadian officials have said they will be pushing for continued
efforts to smooth out the global imbalances that exacerbated the slump that
much of the world is still clawing out of.
“The required rebalancing of global growth has not
yet materialized,” the bank said, contrasting “strong momentum” in emerging
markets with recoveries in economies such as the United States and Japan that
remains “heavily dependent” on low interest rates and government spending.
“In general, broad forces of household, bank, and
sovereign deleveraging will add to the variability, and temper the pace, of
global growth,”’ policy makers said.
The bank flagged the possibility of “renewed
weakness’’ in Europe, where drastic spending cuts and higher borrowing costs
will be the likely result of continent-wide debt problems, but said that, so
far, the effects of the crisis on Canada have been ``limited to a modest fall
in commodity prices’’ and somewhat tighter financial conditions.
The Canadian economy, which on Monday posted a
whopping 6.1-per-cent annualized growth rate for the first quarter – the
fastest in more than a decade – is ``unfolding largely as expected,’’ the bank
said, led mostly by a hot housing market, higher incomes and a labour-market
recovery that have helped fuel consumer spending.
Still, the central bank suggested that household
spending and the economy will slow in the coming months as consumers deal with
higher borrowing costs and try to limit or reduce their debt loads and as
government stimulus spending fades. As a result, an ``anticipated pickup in
business investment will be important for a more balanced recovery,’’ the bank
said.
Inflation, which the central bank has been watching
closely for months, has been in line with policy makers’ projections to exceed
2 per cent this year and reflects a combination of strong domestic demand,
slowing wage increases and ``excess supply’’ leftover from the recession.
The central bank also said it is making a
technical, yet significant, change to re-establish ``normal functioning’’ of
the overnight market, whereby its benchmark will return to halfway between the
rate it pays to chartered banks to hold deposits and the amount that it charges
private-sector lenders for loans.
