Bank of Canada Keeps 1 Percent Key Rate, Notes Risks in World Economy

Central bank adds Ukraine to worries
March 5, 2014 Updated: March 5, 2014

OTTAWA—The Bank of Canada is keeping its low-interest rate policy in place for a while longer, signalling Wednesday that it remains to be convinced the global economy is out of danger—adding Ukraine to its list of worries. 

“Volatility in global financial markets has increased somewhat, reflecting buoyant market conditions in most advanced economies and increased risk differentiation among emerging markets,” it said. “More recently, tensions in Ukraine have added to geopolitical uncertainty.” 

The central bank kept its overnight policy rate at one percent in its scheduled announcement date, a setting that has been in place since September 2010. 

The bank’s decision to stay the course was widely expected by markets, which believe the central bank won’t be anxious to raise interest rates, or even signal its intention to do so, for some time. 

A new report issued by the C.D. Howe Institute on Wednesday judged Canada remains vulnerable to eurozone turmoil, as well as citing potential Ukraine crisis spillover effects. 

“I find the effect of setbacks in the eurozone on Canada’s economy could be significant,” said author Pierre Siklos, a professor at Wilfrid Laurier University’s School of Business and Economics, in a release. 

The impact of a “perfect storm” that brings in the world and U.S. economies could result in an almost eight percent real gross domestic product falloff after two and a half years, he said. 

In the statement, the bank’s governing council was more sanguine about future prospects, dismissing the disappointing fourth quarter in the U.S. as largely owing to the unusually cold winter. Overall, it said conditions had improved somewhat in Canada. 

“On the whole, the fundamental drivers of growth and inflation in Canada continue to strengthen gradually, as anticipated,” it said. 

The Canadian fourth-quarter growth rate came in at 2.9 percent, almost half-a-point better than the bank’s own guess, and at 1.5 percent, January inflation edged closer to the bank’s target of two percent. 

Bank of Canada Governor Stephen Poloz had signalled concern when overall inflation fell below one percent and core inflation remained close to the low end of the Bank of Canada’s range of between 1.0 and 3.0 percent. 

On the housing front, the bank likes what it sees. It said recent data supports its view of a soft-landing scenario, somewhat contradicting a report from a U.S. financial institution this week that predicted prices could fall by 20 percent. And it believes household debt levels are also stabilizing. 

But the bank is not entirely convinced the good news represents a permanent turning point in the outlook. It called low inflation an important downside risk, judging it would remain well below the target for some time. As well, while fourth quarter growth was higher than expected, the first quarter of 2014 will likely be weaker, it said. 

Overall, the bank hasn’t changed its mind that this year will see a modest 2.5 percent advance. 

Meanwhile, while exports have been stronger, they remain an underperformer in the economy and business investment has yet to pick up, it said. 

On top of that, the world remains beset with risks and uncertainty, it cautioned. 

Putting it all together, the bank said “the balance of risks remains within the zone for which the current stance of monetary policy is appropriate.” 

The next interest rate announcement is scheduled for April 16. 

From The Canadian Press