Upbeat outlook boosts markets, Canadian dollar
Bank of Canada governor Mark Carney announced he would hold rates at one per cent Tuesday.
By Eric Lam And John Morrissy, Financial Post; Reuters April 18, 2012 9:58 AM
As expected, governor Mark Carney and the Bank of Canada again maintained interest rates at a stimulus-level one per cent Tuesday.
But Carney’s upbeat assessment of the economy sent the clearest and most hawkish signal yet that rates will be moving higher – probably sooner, rather than later.
The dollar surged on the news, rising one and a third cents to $1.013 US, as markets keyed on a passage in the bank’s statement that said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
This hinges on the fact the bank’s assessment of the economy is far more positive than just a month ago, and led the bank Tuesday to hike its 2012 growth projection to 2.4 per cent from two per cent in January.
“The tone of the statement is relentlessly upbeat,” Doug Porter, deputy chief economist with BMO Capital Markets, said in a note.
“We have pulled our first rate hike call forward to January 2013, but if the global backdrop co-operates, the bank will be moving much sooner than that given their revised outlook for inflation and the output gap.”
Derek Holt, economist with Scotia Capital, said while Carney left him-self wiggle room, he now expects the central bank governor to move sooner than Holt’s earlier forecast of the third quarter of 2013.
Since the bank released its Monetary Policy Report in January, it has seen signs of improvement around the world. It now expects Europe to emerge from recession in the second half and sees the U.S. benefiting from somewhat improved labour markets, financial conditions and confidence.
As for Canada, “The external head-winds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated,” the bank said.
Carney expects domestic demand and consumption to remain the primary driver of the economy, again warning that household debt burdens are still the biggest domestic risk. Business investment will remain robust, but government spending contributions will be modest.
On the other hand, the bank has also trimmed its forecast for 2013 growth to 2.4 per cent from 2.8 per cent, returning to full capacity in the first half of that year, while maintaining a 2.2 per cent outlook for 2014.
Carney characterized inflation as “somewhat firmer than anticipated” in January, and called for consumer price inflation to be around two per cent for the foreseeable future.
The Bank of Canada has kept rates frozen since September 2010, extending the longest pause since the 1950s after if became the first G7 country to raise rates following the financial crisis of 2008.
In mid-2011, the bank signalled its intention to increase rates but had to back off when the European debt crisis overtook events.
Avery Shenfeld, chief economist at CIBC World Markets, said he thinks it will be no different this time around.
“It’s deja vu all over, as the Bank of Canada has reinstated its warnings that higher interest rates are on the horizon,” Shenfeld wrote in an analysis.
But Carney’s upbeat assessment of the economy sent the clearest and most hawkish signal yet that rates will be moving higher – probably sooner, rather than later.
The dollar surged on the news, rising one and a third cents to $1.013 US, as markets keyed on a passage in the bank’s statement that said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
This hinges on the fact the bank’s assessment of the economy is far more positive than just a month ago, and led the bank Tuesday to hike its 2012 growth projection to 2.4 per cent from two per cent in January.
“The tone of the statement is relentlessly upbeat,” Doug Porter, deputy chief economist with BMO Capital Markets, said in a note.
“We have pulled our first rate hike call forward to January 2013, but if the global backdrop co-operates, the bank will be moving much sooner than that given their revised outlook for inflation and the output gap.”
Derek Holt, economist with Scotia Capital, said while Carney left him-self wiggle room, he now expects the central bank governor to move sooner than Holt’s earlier forecast of the third quarter of 2013.
Since the bank released its Monetary Policy Report in January, it has seen signs of improvement around the world. It now expects Europe to emerge from recession in the second half and sees the U.S. benefiting from somewhat improved labour markets, financial conditions and confidence.
As for Canada, “The external head-winds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated,” the bank said.
Carney expects domestic demand and consumption to remain the primary driver of the economy, again warning that household debt burdens are still the biggest domestic risk. Business investment will remain robust, but government spending contributions will be modest.
On the other hand, the bank has also trimmed its forecast for 2013 growth to 2.4 per cent from 2.8 per cent, returning to full capacity in the first half of that year, while maintaining a 2.2 per cent outlook for 2014.
Carney characterized inflation as “somewhat firmer than anticipated” in January, and called for consumer price inflation to be around two per cent for the foreseeable future.
The Bank of Canada has kept rates frozen since September 2010, extending the longest pause since the 1950s after if became the first G7 country to raise rates following the financial crisis of 2008.
In mid-2011, the bank signalled its intention to increase rates but had to back off when the European debt crisis overtook events.
Avery Shenfeld, chief economist at CIBC World Markets, said he thinks it will be no different this time around.
“It’s deja vu all over, as the Bank of Canada has reinstated its warnings that higher interest rates are on the horizon,” Shenfeld wrote in an analysis.
“But when we get there, will the rate hike actually be forthcoming? We doubt it.”
Shenfeld said the bank’s projections for growth could easily be waylaid. Heavily indebted households could become more cautious borrowers.
Also standing in the way of faster rate hikes is the U.S. Federal Reserve, Shenfeld said. Its vow to keep rates at rock bottom into 2014 limits what Carney can do, for fear of sending the dollar to levels that would damage an already suffering export sector.
Bank dismisses Carney rumour
The Bank of Canada on Tues-day dismissed as inaccurate a newspaper report that said governor Mark Carney had been approached as a possible candidate to take over as head of the Bank of England.
The Financial Times, citing what it said were three people involved in the process, said Carney had been approached by a member of the Bank of England’s court, the largely non-executive body that oversees its activities.
“The FT report that Governor Carney was approached as a potential candidate for the head of the Bank of England is not accurate,” said a Bank of Canada spokesman, Jeremy Harrison.
Bank of England governor Mervyn King is due to retire in June 2013.
In London, an official at the Treasury said no decision had been taken yet on the process of appointing King’s successor and said the finance ministry had not approached the Bank of England’s court for help.
“We will announce the selection process for the governor in due course. We want the best person for the job,” the official said.
Carney, who does not hold British nationality, took the helm at the Bank of Canada in 2008 and his mandate ends in 2015. He became chair of the Financial Stability Board, the body tasked with implementing global financial reforms, in November.
Shenfeld said the bank’s projections for growth could easily be waylaid. Heavily indebted households could become more cautious borrowers.
Also standing in the way of faster rate hikes is the U.S. Federal Reserve, Shenfeld said. Its vow to keep rates at rock bottom into 2014 limits what Carney can do, for fear of sending the dollar to levels that would damage an already suffering export sector.
Bank dismisses Carney rumour
The Bank of Canada on Tues-day dismissed as inaccurate a newspaper report that said governor Mark Carney had been approached as a possible candidate to take over as head of the Bank of England.
The Financial Times, citing what it said were three people involved in the process, said Carney had been approached by a member of the Bank of England’s court, the largely non-executive body that oversees its activities.
“The FT report that Governor Carney was approached as a potential candidate for the head of the Bank of England is not accurate,” said a Bank of Canada spokesman, Jeremy Harrison.
Bank of England governor Mervyn King is due to retire in June 2013.
In London, an official at the Treasury said no decision had been taken yet on the process of appointing King’s successor and said the finance ministry had not approached the Bank of England’s court for help.
“We will announce the selection process for the governor in due course. We want the best person for the job,” the official said.
Carney, who does not hold British nationality, took the helm at the Bank of Canada in 2008 and his mandate ends in 2015. He became chair of the Financial Stability Board, the body tasked with implementing global financial reforms, in November.
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