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Bank of Canada slashes economic growth prediction, keeps interest rate at 1 percent

The Bank of Canada said it will keep the trendsetting overnight interest rate at the super-low one percent level

The Bank of Canada says it sees solid signs that the global economy is picking up steam and will take Canada along for the ride, but still expects that it will take some time for this country to fully recover from the crippling effects of the recession.

Despite the rosier outlook, the bank has shaved first-quarter economic growth a full point lower than it previously thought to 1.5 per cent -- mostly due to the severe winter weather -- and for the year as a whole to 2.3 per cent from the previously projected 2.5 per cent.

As such, the bank said it will keep the trendsetting overnight interest rate at the super-low one per cent level to keep encouraging borrowing and spending activity that it judges the economy needs to stay on a growth path.

The rate decision won't come as a surprise to markets, who have penciled in the central bank keeping rates stable for another year or so.

The bank's new monetary policy report on the outlook for the Canadian and global economies, issued Wednesday morning, won't do much to alter that perception as it mostly expands on the previous analysis, which came out in January, with few significant alterations.

The differences lie in the margins -- overall Bank of Canada governor Stephen Poloz and his deputies appear to be a little less worried about overly low inflation, too high house prices and household debt. They also seem more confident in the sustainability of the recovery, and that stronger U.S. demand and the lower Canadian dollar will start to benefit exporters, particularly manufacturers.

``In sum, the bank continues to see a gradual strengthening in the fundamental drivers of growth and inflation in Canada,'' the bank said in a statement. ``This view hinges critically on the projected upturn in exports and investment.''

The most encouraging aspect of the report is what the bank's governing council sees happening to exports, which remain about five per cent below pre-recession levels and are considered the economy's weak link, not only keeping factories operating under capacity and job creation and salary growth muted, but also keeping businesses on the sidelines in terms of spending on needed investments to increase productivity.

Rising energy prices means oil and gas exporters will do even better than previously expected, the bank says. But it is also encouraged that manufacturers will soon see a lift, particularly now that the Canadian dollar has lost about 10 per cent of its previous value since February 2013.

``Canada's non-energy range of export sectors are expected to benefit, including those linked to the U.S. construction activity, such as logging and building materials,'' it says. ``As U.S. investment in machinery and equipment strengthens, export sectors, such as industrial, electrical and electronic machinery and equipment, computers, and aircraft, should strengthen.''

Still, competitive pressures will keep those benefits below the levels one would have expected given the higher demand from the U.S., the report cautions.
The bank says it is still concerned about a downward shift in inflation, but for the present it expects the headline consumer price index will gravitate close to the 2.0 per cent target in the upcoming few months, although that is mostly due to the lower loonie and the effects of higher energy prices.

Core, or underlying, inflation will remain soft, however, and won't return to target until 2016, the bank says. That's a product of slack in the economy and growing competitiveness among retailers. If the bank is right about the analysis, it suggests interest rates won't be raised until sometime in 2016.

After highlighting the dangers of high consumer debt and frothy house prices through most of 2012 and 2013, the bank says that, while the danger has not fully passed, it is less worried about a severe correction that would sideswipe the economy.

``Recent developments are in line with the bank's expectation of a soft landing in the housing market and stabilizing debt-to-income ratios for households,'' it judges.

In a separate section on the likely impact of the ballooning shale oil extraction activity in the United States, the bank said the increased supply may depress crude prices somewhat but won't significantly deter Canada's oil sands production.

``Since shale oil is often as expensive to produce as oil from the Canadian oil sands, only the most marginal and costly Canadian projects would be affected,'' it says.

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  1. Scott posted on 04/23/2014 08:29 PM
    It is unfortunate that Stephen has chosen to favour one area of manufacturing over many others and is keen to devalue the Canadian dollar. As the owner of a factory that buys more from the states in raw materials than we export to the states, the rapid decline in the Canadian dollar is creating havoc all across the supply chain as everyone jockeys for position and tries to raise prices in order to maintain margins. For many companies the 10 percent decline in a matter of months represents a complete erosion of their ebitda margin. Many manufacturers will go out of business as a result of the dollars decline, and yes some will certainly benefit. Frankly, Stephen Poloz was the worst thing to happen to many manufacturers and when they go out of business and more jobs are lost, and the tax revenue shrinks much of this will rest on his shoulders! We need Mark back!
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