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Bank of Canada cautious on growth, warning Ukraine tensions are stoking global uncertainty

OTTAWA — Canada’s economy is performing slightly above forecasts, but there are new storm clouds in Eastern Europe and emerging markets.

For that reason, the Bank of Canada on Wednesday again kept its trendsetting interest rate on hold.

Little surprise there. The central bank’s overnight rate — the target level for loans between commercial institutions — has not budged from a near-record low 1% since September 2010.

Most economists still don’t expect any movement on rates until at least mid-2015 — and that adjustment is more likely to be up, not down, if the economy shows stable growth and inflation picks up.

Wednesday’s statement did not veer far the January rate announcement.

The Bank of Canada said “the fundamental drivers of growth and inflation in Canada continue to strengthen gradually, as anticipated.”

“With inflation expected to be well below target for some time, the downside risks to inflation remain important. At the same time, the risks associated with elevated household imbalances have not materially changed.”

But policymakers, led by governor Stephen Poloz, who in October dropped the bank’s long-standing bias toward an eventual rate increase, limited their outlook for inflation, saying price rises would remain below the bank’s 2% target “this year.” The January statement said inflation would hit that target “in about two years.”

Also, the bank said the global economy is “evolving largely as expected.”

“The United States is still expected to lead the acceleration in advanced economies, although recent data have been softer, largely owing to weather effects,” it said.

“Volatility in global financial markets has increased somewhat, reflecting buoyant market conditions in most advanced economies and increased risk differentiation among emerging markets. More recently, tensions in Ukraine have added to geopolitical uncertainty.”

Charles St-Arnaud, at Nomura Global Economics in New York, said data since January “have been slightly tilted to the positive side. Growth and inflation were stronger than expected.”

“However, the data for December was very weak due to weather effects, and the annual [capital expenditures] showed continued subdued business investment intentions in 2014.”

The so-called “rebalancing of the economy toward business investment and net exports [away from consumer spending] continues to be elusive,” he said.

Canada’s gross domestic product grew at an annualized 2.9% in the last quarter of 2013, better than many forecasts, and an improvement on the 2.7% gain between July and September. Statistics Canada revised second-quarter growth to 2.2% from an earlier estimate of 1.6%, and increased the first-quarter data to 2.9% from 2.3%.

For all of 2013, GDP grew 2%, compared to average forecasts of around 1.7%. But for December alone, the economy actually contracted by 0.5% because of extreme weather conditions that also cut into retail sales.

“Growth should slow in Q1, as the weakness in December creates a weak starting point for the quarter and the strong inventory accumulation for a second consecutive quarter could be reversed in part in Q1.”

The rate of inflation — the Bank of Canada’s main focus of monetary policy — is expected to remain at the bottom end of policymakers’ target of 2%, the midway point of their 1%-to-3% comfort range.

“Inflation for the month of January rose to 1.5% [year-over-year] and is up from the 0.7% [year-over-year] trough set in October,” Derek Holt, vice-president of Scotiabank Economics, said in a note to investors.

“We continue to believe that inflation is likely to come right back down to around the 1% range or possibly lower in the next print and this should negate any sense of much progress toward the 2% inflation target.”

Statistics Canada will report February inflation numbers on March 21.

Another major concern for the Canada’s economy, of course, is the cloudy employment picture. After recouping all the lost jobs from the 2008-09 recession, hiring has been meagre and wildly inconsistent.

Some of that can be blamed on the way employment data is collected — mostly by phone and with a significant margin of error in the crunched numbers.

But stalled employment and the much-touted mismatch of skills. In other words, not enough corporate money is being spent on investment and breaking into new markets, while positions are going unfilled as companies struggle to attract workers to where jobs already exist.

“The jobs that are available, some of which have been available almost indefinitely, and there are sort of standing opening, simple can’t be filled because the people with the right skills aren’t there to fill them,” said Derek Lothian, national spokesman for Canadian Manufacturers & Exporters.

On Friday, Statistics Canada will release its labour force survey for February. Benjamin Reitzes,senior economists at BMO Capital Markets, said “look for another bounce back” from December’s huge 45,900 plunge.

There were 29,400 jobs added in January, as full-time employment increased and the jobless rate eased 0.2 percentage points to 7%.

“We’re calling for a 20,000 increase and the jobless rate to fall back to 6.9%. Even with the gain though, employment will be up less than 1% from a year ago,” Mr. Reitzes said.

Source: Financial Post

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