OTTAWA — Canada’s economy may be underperforming, but at least it is keeping consumer prices and borrowing costs in check.
[np_storybar title=”Central bankers pause before making next monetary policy moves” link=”http://business.financialpost.com/2013/07/17/central-bankers-pause-before-making-next-monetary-policy-moves/”%5DWith the global economy still struggling to find sustainable traction, it’s not surprising that central bankers in Canada and elsewhere are taking pause to reflect and consider their next monetary policy moves. Keep reading.
Although inflation picked up speed last month — fuelled by the higher cost of gasoline and cars — that pace is not expected to continue and certainly will not nudge monetary policymakers any closer to raising interest rates.
Statistics Canada said Friday the annual rate of inflation was 1.2% in June, up from 0.7% the previous month, but in line with economists’ forecasts and matching the level last seen in February. Meanwhile, the core inflation rate — minus volatile items such as some energy and food products — rose 1.3% year-over-year in June, also in line with expectations, following a gain of 1.1% in May.
“Inflation may have sped up a bit in June, but the bottom line for Canada’s economy is that slow growth continues to keep inflationary pressures under wraps,” said economist Emanuella Enenajor, at CIBC World Markets.
For Stephen Poloz, the new governor of the Bank of Canada, that is an enviable position to be in as he meets for the first time with other Group of 20 financial leaders this week in Moscow.
Policymakers at the central bank on Wednesday forecast economic growth of 1.8% this year, followed by 2.7% in both 2014 and 2015. Not great, but still better than many other developed nations around the G20 table.
That moderate growth and weak inflation — along with lingering concerns over risks to the global economy — are likely to keep the central bank on the sidelines until at least the latter part of 2014, according to economists.
Its trendsetting interest rate has been at a near-record low 1% since September 2010. Mr. Poloz, 57, on Wednesday reiterated the bank’s stance to hold borrowing costs at that level.
How and when central bankers should telegraph moves to ease long-standing monetary stimulus was to be among the issues raised at the G20 meeting.
There have been calls for clearer “forward guidance” from central banks after U.S. Federal Reserve chairman Ben Bernanke spooked global markets with comments on the timing of the withdrawal of asset purchases — or quantitative easing — from the world’s biggest economy.
Mr. Poloz addressed transparency concerns after Wednesday’s rate decision, and attempted to clarify the timing of an eventual hike in borrowing costs.
“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 policy stimulus currently in place will remain appropriate,” he told reporters.
“Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.”
But the Bank of Canada has said it expects consumer prices to remain subdued for the time being, with inflation likely to remain below its target — the midway point of its 1% to 3% comfort zone — until the second half 2015.
Douglas Porter, chief economist at BMO Capital Markets in Toronto, said policymakers likely believe that inflation has been “too low for comfort.”
“They’re not going to be wringing their hands over this modest increase in headline and core inflation,” he said. “This is why the Bank of Canada can be so very leisurely in its plan to ‘renormalize’ interest rates.”