(Reuters) - The Bank of Canada said on Wednesday it will hold its benchmark interest rate steady at 1 percent while the economy remains fragile and inflation stays low, but that it sees rates rising if the economy performs in line with expectations.
The policy announcement, the first under new
Governor Stephen Poloz, delivered roughly the same message as those of his
predecessor, Mark Carney, over the past year: The next move is a rate hike, not
a cut, although it won't be any time soon.
Still, Poloz, who took over
at the helm of the central bank in June, was more explicit in stating that the
continuation of steady rates depended on three key trends.
"As long as
there is significant slack in the Canadian economy, the inflation outlook
remains muted, and imbalances in the household sector continue to evolve
constructively, the considerable monetary policy stimulus currently in place
will remain appropriate," Poloz said at a news conference to announce the bank's
"Over time, as the normalization of these conditions unfolds,
a gradual normalization of policy interest rates can also be expected,
consistent with achieving the 2 percent inflation target."
downplayed the so-called hawkish bias in the statement and made it clear any
move was still far in the future.
"We never saw that as some sort of
signal that we were on an imminent tightening phase or anything like that," he
said. "Rather it was to help people understand that these are not normal times.
So you need to be more prepared for a gradual return to normality."
Canada's export-reliant economy has struggled to stay on a growth track
after a relatively speedy recovery from the world economic crisis. Inflationary
pressures remain muted.
The bank did not provide specific thresholds
that could trigger a rate increase.
Poloz listed an array of factors the
bank would watch, including more U.S. and global growth momentum, but said it
would mostly be a judgment call by the bank.
His comments came as
Federal Reserve Chairman Ben Bernanke said the U.S. central bank still planned
to start scaling back its massive bond purchase program later this year, but it
could change those plans if the outlook shifted.
Poloz said Bernanke's
recent remarks on the so-called tapering of the Fed's stimulus measures were
"Markets are learning from that, as are we," he said.
Following the decision and the new governor's comments,
traders slightly bid up the price of shorter-term bonds, sending yields lower,
showing there was little concern the central bank would rush to boost interest
"They tweaked - very, very slightly - the eventual tightening
bias, but not in any meaningful way, I don't think," said Mark Chandler, head of
fixed income and currency strategy at the Royal Bank of Canada.
"Overall, I think it was quite cautious. I'd hate to paint it
specifically dovish or hawkish."
The Canadian dollar weakened to a
session low against the U.S. dollar after the statement, sliding to C$1.0445
versus the greenback, or 95.74 U.S. cents. But it quickly regained most of the
The central bank has held its overnight rate at 1 percent
since September 2010, the longest period between rate changes since the 1950s.
Since April 2012, it has been hinting at rate hikes to come, making it the only
central bank in the Group of Seven major economies to have a hawkish bias,
albeit a mild one.
Market players don't expect a move until the fourth
quarter of 2014.
FLOODS, STRIKE HIT QUARTER
The bank cut its
forecast for second-quarter growth sharply - to 1 percent from 1.8 percent -
largely due to the impact of catastrophic flooding in Alberta and a strike by
construction workers in Quebec. But it said third-quarter growth would more than
compensate for that decline. It forecast third-quarter growth of 3.8 percent, up
from its previous estimate of 2.3 percent.
That meant the volatility of
the two quarters would not play into its policy choices.
The bank said
the economy would grow 1.8 percent this year, up from its previous estimate of
1.5 percent. It expected growth of 2.7 percent each year in 2014 and 2015. The
2014 forecast was lowered from the 2.8 percent previously estimated.
overall growth outlook is little changed from its April forecast, and the bank
sees a return to full capacity and inflation rising to its 2 percent target by
On Canada's once-hot housing market, Poloz did not rule out a
rebound even after signs of cooling earlier this year. Household debt has eased
but could also pick up again, he said.
"As I read the situation right
now, the new data that we have from the housing sector is just as consistent
with a soft landing as they might be with a rebound," he said.
past statements have referred to the "persistent strength of the Canadian
dollar," the currency has weakened in recent weeks and the bank avoided the
"In general, we would prefer not to offer a running commentary
on the dollar in any case," Poloz said.