Bank of Canada ends rate hike warning, cuts growth outlook - Action News
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Bank of Canada ends rate hike warning, cuts growth outlook

The Bank of Canada holds its key interest rate at one per cent and cuts its outlook for economic growth to 1.6 per cent this year, 2.3 per cent in 2014 and 2.6 per cent in 2015, a sizable cut from its July forecast.

Key overnight lending rate held at 1%, but bank drops warning of rate hike

Bank of Canada pessimism

11 years ago
Duration 2:04
Canada's central bank lowered forecasts and even raised the possibility it could cut its trend-setting interest rate, Havard Gould reports

The Bank of Canada has held itskey interest rate at one per centand cutits outlook for economic growth from now until 2015.

In its monetary policy report released today by Governor Stephen Poloz, the central bank has cut its outlook for economic growthto 1.6per cent this year, 2.3per cent in 2014 and 2.6 per cent in 2015, a sizable downgradefrom its July outlook.The bank says it sees the economy returning to full capacity by the end of 2015.

The statement also removes the banks warning that a rate hike is inevitable, a "major turn in guidance,"according to Andrew Pyle, senior wealth adviser and portfolio manager at Scotia McLeod.

The central bank had adopted a statedbias towards hiking ratesin April 2012 to caution consumers about over-borrowing.

The change in guidance has led to the assumption amongmarket watchers that it is just as likely the bank will cut the key one per cent overnight rate in the future as hike it.

At a news conference following the release of the bank's monetary policy report and rate announcement, Poloz made no effort to dissuade markets from that assumption.

"The statement is making it clear we have balanced the risks," Poloz said. "If we were to receive more data flow that was more negative for that inflation outlook, then we would need to rethink that balance."

The Bank of Canada says softer-than-expected U.S. growth pushed its economic forecast lower, but that it expects"a better balance between domestic and foreign demand will beachieved over time and that economic growth will become more self-sustaining."

In its July report, the bank had predicted the Canadian economy would grow 1.8 per cent this year, followed by 2.7 per cent in 2014 and 2015, returning to full capacity in mid-2015. But Poloz is now more pessimistic.

"In Canada uncertain global and domestic economic conditions are delaying the pick up in exports and business investment,this leaves the level of economic activity lower-than-expected," he said.

The announcement sent the Canadian dollar plummeting, down0.92cents against the U.S. dollarto 96.28cents USin late afternoon trading.

That won't be the end, according to Pyle, who says he sees the Canadian dollar falling to 92 cents US within a month, and that he believes Poloz is attempting to push the dollar down to boost exports.

"Exports were supposed to be the engine of growth for the economy, out of 2013, through to 2014. Its clearly not happening," Pyle said in an interview with CBC's Lang & O'Leary Exchange.

"I would bet right now the Bank of Canada would like a little bit of juice from the currency, whether it's a two to five centdecline, back down to where its90 cents, to get the export sector going."

The lower economic outlook and stubbornly low inflation mean the Bank of Canada is likely to hold interest ratesfor at least another two years, Pyle says. For people with variable rate mortgages, that could mean no change until 2016, but he warns that higher bond yields may push up rates for people looking at a mortgage with a five-year term.

TD Bank says it now believes rates will stay unchanged until 2015, according to commentary by economist Diana Petramala.

Interest rate hikes will be gradual and dependent on economic performance and financial conditions going forward, with the bank keeping a close eye on the evolution of domestic risks, Petramala says.