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Battle of housing bubble won, Carney focuses on economic growth

By Kevin Carmichael

Published Mar. 06 2013 by The Globe and Mail


The Bank of Canada is putting its focus squarely on economic growth.

In a revised statement on its policy intentions, the central bank indicated that it thinks the risk of a housing bubble has passed, dropping language that said future interest-rate increases might be needed to dissuade households from piling on debt.

Leaving its benchmark interest rate at 1 per cent, the Bank of Canada said weak economic growth and muted inflation mean that “considerable” monetary stimulus “will likely remain appropriate for a period of time.”

Policy makers declined to signal how long that period might last, and they stopped short of making a complete pivot from their previous guidance, saying again that the next interest-rate move – whenever it comes – likely will be an increase.

“With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, 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,” the Bank of Canada said Wednesday.

The new guidance signals a deteriorating economy has overtaken worries about a housing bubble.

For months, the Bank of Canada warned that concerns about financial stability could force higher rates, despite tepid economic growth. However, there is mounting evidence that households are taking control of their finances on their own, negating the need for a jolt from higher borrowing costs. Mark Carney, the central bank’s governor, said last week that he felt Canadians were getting their debts under control, noting that credit growth has slowed to about the same pace as the rise in incomes.

“With a more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels,” the central bank said in its policy statement. “The bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.”

But as concern about a housing bubble deflates, worries about overall health of the economy have grown.

On Bay Street and Wall Street, a small, but growing, number of analysts have begun predicting an interest-rate cut. Canada’s economy slowed to stall speed over the second half of 2012, as factory shipments plunged, retail sales fell and the housing market cooled. The Canadian dollar has fallen three cents against the U.S. dollar since the Bank of Canada previously set policy at the end of January, in part because investors anticipate the central bank will have to back away from its inclination to raise borrowing costs.

While Wednesday’s statement is a watering down of the Bank of Canada’s previous guidance, it stops short of a full pivot. They reiterated that, for now at least, the benchmark rate’s ultra-low setting should be enough to get Canada’s economy through its current soft patch.

And rather than panic in the fact of poor indicators, policy makers are predicting a rebound over the course of 2013. They said the report that showed Canada’s gross domestic product grew only 0.6 per cent in the fourth quarter is better than its looks on the surface, as a “sharp” reduction in inventories masked “solid growth” in many other segments.

Still, it’s clear the Bank of Canada would like that rebound to be more vigorous.

Policy makers noted that inflation is “somewhat more subdued” than they had expected in January, indicating they will need to keep rates low for longer to get price increases back to their target of a 2 per cent annual rate. They also repeated that exports will remain below their pre-recession peak until the second half of 2014, limiting Canada’s growth potential.

Source: The Globe and Mail

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