The Bank of Canada tipping away from rate rise
The Bank of Canada is re-evaluating its efforts to reign in inflation in light of the upheaval in the global financial markets, Deputy Governor Pierre Duguay said Monday evening.
As a result, the central bank is less likely to raise its trendsetting interest rate next week than it had indicated a month ago when it said that inflationary pressure in the economy was its main pre-occupation. In a speech Monday, Mr. Duguay raised concerns that the crisis in the sub-prime mortgage market has flowed through to the broader economy and could reduce growth in Canada.
In July, the Bank of Canada raised its interest rate by a quarter a percentage point to 4.5 per cent - the first increase in over a year - and indicated that further hikes may be required to bring inflation back down to its 2 per cent target. "But given recent events in global credit markets, we need to assess the extent to which the risks around our July projection have shifted," Mr. Duguay told the Canadian Association of Business Economists.
He said the central bank is concerned about two issues: how developments in the U.S. economy, where the Federal Reserve has already forecast a slowdown, would affect Canada and the extent to which Canadian companies and consumers are facing a credit crunch as a result of the re-pricing of credit risks by financial institutions.
The Bank of Canada is due to make its next pronouncement on interest rates next Wednesday, and bond markets have indicated that traders do not expect an increase. While the Canadian central bank intervened in credit markets earlier this summer to provide liquidity to lenders, it has yet to move on interest rates.
In the United States, the Federal Reserve cut its discount rate by a half a percentage point on Aug. 17, in an effort to ease a growing credit crunch. At that time, the fed said the turmoil in financial markets had reduced lending and increase uncertainty, and had the potential to reduce growth overall.
Mr. Duguay said the Canadian economy has remained strong, as yet showing little impact of the tighter credit conditions or the increasing gloom south of the border. The economic indicators, so far, are in line with the Bank's expectations in July, when it suggested further interest rate hikes may be required.
"Domestic demand in Canada has remained robust, against the backdrop of strong labour and housing markets," he said. Mr. Duguay did not provide any update of the bank's July forecast for economic growth or inflation, saying that will be provided next week.
Last month, the bank said it expected average annual growth of about 2.5 per cent through 2009, but several private-sector economists have cut their growth forecasts as a result of the turmoil in credit markets.
But the bank expected the report on economic growth in the second quarter would show a solid 2.8-per-cent gain which would add to inflationary pressures. That growth figure will be released on Friday. It also noted that core inflation was running above its 2-per-cent target, and would continue to do so until early 2009. The July inflation figures confirmed that trend, at least in the short term.
Mr. Duguay said the central bank has not changed its determination to fight inflation, but is questioning how much action may be needed, given the worsening conditions in credit markets. He noted that both the Bank of Canada and the country's chartered banks have acted to reduce the impact of the credit crunch in money markets. The central bank undertook open market activities to improve liquidity earlier this month, while the private sector banks have confirmed they are supporting their own asset-backed commercial paper markets.
Source: ReportonBusiness
Date: 28.08.2007 [ID: 83]