Bank of Canada met today

JEREMY TOROBIN

OTTAWA- Globe and Mail Update

Published Tuesday, Apr. 12, 2011 9:06AM EDT

Last updated Tuesday, Apr. 12, 2011 12:01PM EDT

Bank of Canada Governor Mark Carney held his benchmark interest rate at 1 per cent Tuesday, balancing a stronger-than-expected domestic recovery against ongoing global threats and the Canadian dollar's dampening effect on exports and inflation.

In explaining the decision to leave borrowing costs alone for the fifth consecutive meeting, as expected, the central bank hinted that it is getting ready to resume a tightening campaign some time in the coming months, by softening a reference in its statement to the amount of slack in the economy and saying it would be chewed up more quickly than expected.

Previewing a quarterly forecast due Wednesday, the Bank of Canada boosted its 2011 growth projection for the economy to 2.9 per cent from 2.4 per cent, while lowering it for next year to 2.6 per cent from 2.8 per cent.

Mr. Carney and his rate-setting panel also said they now expect the "excess supply" from the recession to be absorbed by mid-2012, six months earlier than in their last forecast, calling the amount "material" instead of "significant."

The new timeline and characterization imply a faster than planned path to a so-called neutral monetary policy rate of somewhere between 3 per cent and 4 per cent, but there was little else in the statement to suggest Mr. Carney may be considering a move at his next meeting on May 31.

``The needle is slowly moving to renewed rate hikes, but a hike is not yet imminent,'' Doug Porter, deputy chief economist at BMO Nesbitt Burns, said in a note to investors. ``We continue to believe that the Bank will hold off until July.''

Despite "the emergence of broader global inflationary pressures" and a projection that soaring energy prices and other temporary factors could push Canadian inflation to around 3 per cent in the current quarter, the central bank suggested the strong currency, which makes imports cheaper and exports more expensive, gives policy makers more time before price gains become less manageable.

"The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices," the central bank said. "Any further reduction in monetary policy stimulus would need to be carefully considered."

Indeed, even as Canadians chafe at higher gasoline and food costs, the central bank's preferred measure of inflation, which strips out volatile items such as fresh fruit and energy, has been dropping. The so-called core rate will rise "gradually" to the bank's 2-per-cent goal by mid-2012, policy makers said, "as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well anchored."

That last point is somewhat debatable, since the central bank's latest survey of businesses across the country showed a growing number of Canadian companies bracing for hotter inflation as energy and food costs increase. And in some cases, those expectations are already translating into higher prices for consumers.

Still, with unemployment at 7.7 per cent and companies heeding Mr. Carney's calls and starting to focus more on improving their productivity - as opposed to simply adding staff - it seems likely that wage growth won't take off anytime soon.

Moreover, the loonie's effect on exports is crucial given the turmoil outside Canada's borders, from the Middle East and North Africa to Japan, and impediments to faster recoveries in the United States and Europe.

The currency, which is being supported by high oil prices since Canada is a major producer and exporter of energy, has been trading above $1.04 (U.S.) for days. A Statistics Canada report Tuesday suggests the loonie hampered exports in February, as the trade surplus narrowed unexpectedly because of weaker foreign sales of cars, trucks and energy products.

The global recovery is ``becoming more firmly entrenched and is expected to continue at a steady pace,'' the bank said, as growth in the United States solidifies, the European expansion strengthens, and global financial conditions ``remain very stimulative and investors have become noticeably less risk averse.''

However, policy makers noted that the U.S. rebound will be constrained by efforts to trim household and government debt, Europe's peripheral nations continue to face debt challenges of their own, and Japan's disasters will ``create short-term disruptions to supply chains in advanced economies'' - as evidenced already by auto-plant shutdowns in North America.

In addition, the central bank continued to express concern that some emerging-market economies might overheat, saying ``persistent excess demand'' is fuelling much of the rise in commodity prices and contributing to worldwide inflation.

For Canada, the bank said growth is steadily rebalancing toward exports and business investment, and away from government stimulus and spending by households, while warning that net exports - the difference between what a country sells abroad and what it buys from foreign sources - will be ``further restrained'' by the loonie and the ``ongoing competitiveness challenges'' that Mr. Carney has warned about in recent months.

Mark Carney boosts forecast, holds rate

JEREMY TOROBIN

OTTAWA- Globe and Mail Update

Published Tuesday, Apr. 12, 2011 9:06AM EDT

Last updated Tuesday, Apr. 12, 2011 12:01PM EDT