The Bank of Canada kept its main interest rate unchanged for a 14th time and said it may raise interest rates with the domestic economic recovery proceeding as forecast, even as global risks have increased.
Canada’s growth prospects remain “largely consistent with expectations” while the global outlook “has weakened in recent weeks,” the Ottawa-based central bank said. The unchanged rate of 1 percent was forecast by all 27 economists surveyed by Bloomberg News.
The world’s 10th largest economy may be hindered by a deepening debt crisis in Europe, slowing U.S. job growth and cooling emerging markets, which have cut prices of commodities Canada exports. Trading in overnight swaps shows some investors are betting Canada will lower rates later this year.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” policy makers led by Governor Mark Carney said in a statement. The phrase echoed the bank’s previous decision in April.
The bank also said that “some of the risks around the European crisis are materializing and risks remain skewed to the downside,” while labelling as “modest” the expansion in the U.S., Canada’s biggest trade partner.
Canada reported June 1 the economy grew at a 1.9 percent annualized pace in the first quarter, less than the central bank’s 2.5 percent April estimate, as consumer spending slowed. More recent data have shown domestic strength, with housing starts at the highest since September 2007 and the biggest two-month job gain in more than 30 years.
“The Canadian economy continues to operate with a small degree of excess capacity,” the central bank said, adding that housing has been stronger than expected, leading to a “less balanced” recovery.
The central bank also said that a drop in gasoline prices means inflation will slow to less than their 2 percent target.
European policy makers are arguing over whether rescue funds can be given directly to troubled banks, and whether indebted countries such as Greece could have access to new bonds backed by all of Europe’s fiscal union to help lower their borrowing costs.
CAE Inc., the Montreal-based producer of flight simulators, said May 23 it will fire 300 workers because of European military budget cuts.
Finance Minister Jim Flaherty yesterday said he’s prepared to offer new stimulus if it is required and that growth so far this year has been about what he expected. “These continue to be sensitive times,” Flaherty said in Toronto.
Flaherty introduced a budget in March that plans to cut 12,000 government jobs and reduce spending as the majority Conservative government tries to eliminate a C$23.5 billion ($23.9 billion) budget deficit by the fiscal year beginning April 2015.
The economy is being supported by low interest rates in bond markets, with yields on long-term government debt at the lowest in Bank of Canada monthly figures dating back to January 1919.
Trading in overnight swaps Monday showed investors have priced in 34 basis points of easing by the end of the year.
The Canadian dollar touched a six-month low Monday, reaching C$1.0447, the weakest level since Nov. 28. The currency’s “persistent strength” and a lack of competitiveness will mean a weak recovery in Canada’s exports, the central bank reiterated.
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