Canada maintains rate, outlook, sees higher 2013 growth

    Canada's central bank maintained its policy rate and outlook for rates to slowly rise but said  economic growth is expected to "choppy in the near term" with growth in 2013 higher than expected but slightly lower than expected in 2014.
    But the Bank of Canada (BOC), which has held its target for overnight rates steady at 1.0 percent since September 2010, also reassured markets that it would not tighten its policy in the near term.
    "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 stimulus currently in place will remain appropriate," the BOC said, echoing other major central banks that have sought to calm fears that higher interest rates may jeopardize the economic recovery.
    The BOC said economic growth is forecast to average 1.8 percent this year, up from its April forecast of 1.5 percent, and then by 2.7 percent in both 2014 and 2015, helped by rising exports - "despite ongoing competitiveness challenges" - that should boost confidence and lead to increasingly solid growth in business investment.
    In its April policy report, the BOC had forecast growth of 2.8 percent in 2014 and 2.7 percent in 2015.
    Overall economic growth - also underpinned by growing consumer spending along with a modest decline in residential investment - should gradually close the economy's output gap by mid-2015, as also expected in the BOC's previous economic forecast.
    "Over time, as the normalization of these conditions unfolds, a gradual normalization of policy rates can also be expected, consistent with achieving the 2 per cent inflation target," the BOC added.
    While the substance of the BOC's forward guidance did not change under its new governor, Stephen Poloz, the wording was tweaked, the only real sign of a change since he took over from Mark Carney who left to become governor of the Bank of England on July 1.
     At Carney's last meeting in May, the BOC had said "the considerable stimulus currently in place will likely remain appropriate for a period of time after which some modest withdrawal will likely be required."
    Canada's economy improved in the first three months of the year, with Gross Domestic Product up by 0.6 percent from the previous quarter, the highest quarterly growth rate in 18 months. Compared with the first quarter of last year, GDP rose by 1.4 percent, up from 1.0 percent in the four quarter.
    As the International Monetary Fund, the Bank of Canada trimmed its global growth forecast due to slower growth in China and emerging economies. The BOC sees global growth of 2.8 percent this year, down from its April forecast of 3.0 percent. Earlier this month the IMF cut its global growth forecast to 3.1 from 3.3 percent.
    Inflation in Canada is expected to remain subdued in the near term due to excess capacity, low wage increases and pressure on retailers but the BOC expects core and headline inflation to return to its 2 percent target by mid-2015, signaling the likely timeframe for policy rates to rise.
    In May, Canada's headline inflation rate rose to 0.7 percent from April's 0.4 percent.

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