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CANADA ECONOMICS: BOC Monetary Policy Report Summary

Posted
1/22/2014 10:09:00 AM
By: MT Newswires
Referenced Stocks:

This text is a commentary of the Governing Council of the Bank of Canada.

Highlights:

- Inflation has moved further below the 2% target and its path is now expected to be lower than previously projected. Inflation is expected to return to the 2% target in about two years.

- Global economic growth is expected to strengthen over the next two years, led by stronger momentum in the United States.

- In Canada, growth improved in the second half of 2013, although there have been few signs of the anticipated rebalancing towards exports and business investment.

- The Bank projects that the Canadian economy grew by 1.8% in 2013, and will grow by 2.5% cent in both 2014 and 2015, gradually returning to full production capacity over the next two years.

"Inflation in Canada has moved further below the 2% target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2% target in about two years, as the

effects of retail competition dissipate and excess capacity is absorbed.

"Global growth is expected to strengthen over the next two years, rising from 2.9% in 2013 to 3.4% in 2014 and 3.7% in 2015. The United States will lead this acceleration, aided by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets. Growth in other regions is evolving largely as projected in October. Global trade growth plunged after 2011, but is poised to recover as global demand strengthens.

"In Canada, growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment. Stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment. Meanwhile, recent data have been consistent with the

Bank's expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

"Real GDP growth is projected to pick up from 1.8% in 2013 to 2.5% in both 2014

and 2015. This implies that the economy will return gradually to capacity over the next two years.

"The outlook for inflation is subject to several risks emanating from both the external environment and the domestic economy. The most important risks are stronger U.S. investment, underperformance in Canadian exports, and imbalances in the household sector. Overall, the Bank judges that the risks to the projection for inflation are roughly balanced.

"Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed. Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore

has decided to maintain the target for the overnight rate at 1%. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks."