Interest rate hike unlikely this year: RBC economist
Published Thursday, March 8, 2012 12:59PM EST
It's unlikely the Bank of Canada will raise its key overnight rate until at least the end of the year, and then only if economic conditions continue to improve, an RBC economist says.
The central bank held its rate at a historic low of one per cent for the 12th consecutive time Thursday, stating the global economy is stabilizing and domestic prospects are improving.
"One thing that emerged in this statement was essentially it was a little more upbeat in terms of the global outlook," assistant chief economist with RBC Paul Ferley told CTV News Channel Thursday.
"There's a passing reference to U.S. growth being stronger than expected and they've bumped up Canadian growth in the first quarter of this year," he said.
At the same time, the bank's governor Mark Carney left elbow room for stimulus in case the world and domestic economies spiral downward in the coming quarters, as a result of rising oil prices or uncertainty in Europe and the Middle East.
Also, Canada may be only going through a short-term rise in economic indicators.
"They implied (Canadian economic growth) was likely going to be due to temporary factors and we would be seeing growth easing back down in the second quarter," Furley said.
He called the bank's statement more "upbeat" but still cautious.
Furley said if the economy continues to chug along, he wouldn't rule out a rate increase by the end of the year, but more likely in 2013.
Markets and financial institutions were so confident of Thursday's decision, the Bank of Montreal felt no compunction in announcing Wednesday it would drop its promotional five-year mortgage rate half a point to 2.99 per cent.
That move could spark another mortgage fight among major lenders.
The central bank said the Canadian economy is growing faster in the first three months of this year than in its previous call for a 1.8 per cent advance.
The revision comes after Statistics Canada last week upgraded third-quarter growth to a robust 4.2 per cent - seven-tenths higher than previously reported - and calculated December's hand-off to the new year was relatively strong.
For Canada, Carney said the No. 1 risk continues to be household debt, which currently stands at a record 153 per cent of disposable annual income.
Some economists had expected the revisions might push the central bank to revise its call for the economy to return to normal by two or three quarters to the beginning of 2013, but the policy team made no mention of the output gap in its statement.
Instead, the central bank said it believes much of the improvement in Canada has been of a temporary nature, suggesting it hasn't changed its mind that economic growth in 2012 will continue to slow to about two per cent, from last year's 2.5 per cent gain.
Still, it said private demand is expected to be slightly stronger, consumer spending will remain high as households add to their debt burdens and net exports will be stronger too, if still modest.
A slower economy and higher oil prices will likely lead to an increase in inflation, the bank said, averaging about two per cent.
"Reflecting all of these factors, the bank has decided to maintain the target for the overnight rate at one per cent," it stated.
"With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada."
With files from The Canadian Press