Mark Carney's final report: Bank of Canada keeps policy rate unchanged

OTTAWA – The Bank of Canada says it will need to keep interest rates at current, stimulative low levels for some time to come, although it had some good news in the final report under governor Mark Carney — the economy performed stronger than anticipated in the first quarter of 2013.

As expected, the central bank kept the trendsetting policy rate at one per cent, where it’s been since September 2010, helping bring about some of the most favourable borrowing conditions ever for Canadian consumers and businesses.

As well, the bank statement kept in place its forward looking guidance to markets that the current policy position will likely be needed for some additional time, after which Canadians should look for a modest increase in interest rates.

Some analysts had speculated the outgoing Carney, who departs for the Bank of England as of Saturday, may adjust the guidance but the statement released Wednesday showed no such inclination from the governor.

In essence, the bank is saying that the Canadian economy continues to require considerable monetary stimulus in order to keep its head above water, given that governments are providing little stimulus, the housing market is in decline, commodity prices are weak, and the export sector, while recovering, continues to be hampered by a strong dollar, weak demand and competition.

It predicts Canada’s economy won’t return to full capacity until mid-2015, which some economists suggest may be the point where Canadians should expect to see interest rates normalize.

The year started off on a stronger footing than expected, the bank said. It had expected a 1.5 per cent rebound after the 0.6 per cent stall of the fourth quarter in 2012. In fact, now expects an even higher bump.

The loonie was up about a quarter-cent after the bank’s announcement but remains near 11-month lows.

“In Canada, recent economic indicators suggest that growth in the first quarter was stronger than the bank projected in April,” it said, suggesting that the bank agrees with the private sector consensus of a plus two-per-cent advance.

But the bank cautioned that a sprint at the beginning of 2013 doesn’t change the result of the marathon it faces.

“For the year as a whole, growth is expected to remain broadly in line with the bank’s (April) forecast” of 1.5 per cent growth,” it said.

“Over the projection horizon, consumer spending is expected to grow at a moderate pace, business investment to grow solidly, and residential investment to decline further from historically high levels.”

Exports will likely continue to recover, “but to be restrained by subdued foreign demand and ongoing competitive challenges, including the persistent strength of the dollar.”

The outlook is broadly in line with the new 1.4 per cent growth forecast for Canada from the Organization for Economic Co-operation and Development, also released Wednesday. The OECD had been more optimistic in November, when it estimate 1.8 per cent growth in Canada for 2013 as a whole.

The bank has long worried about the long-term impact of keeping interest rates at floor level for an extended period, particularly if they trigger a housing bubble and mountains of household debt that can’t be sustained when rates go up.

But it is being helped by circumstances. The real estate market is moderating, household credit growth is slowing and family debt levels are stabilizing, albeit at record high levels. As well, inflation is likely to remain subdued for some time.

“Reflecting all these factors … the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving a two per cent inflation target,” the bank concluded.

Incoming governor Stephen Poloz, who takes over on June 3, will bring new eyes to the situation and may draw a different conclusion. But unless conditions materially change, most analysts believe the former head of the government’s Export Development Corp. is unlikely to make any immediate changes.