OTTAWA: The Bank of Canada signaled its continuing concern about weak inflation on Wednesday, maintaining its neutral stance on interest rates and suggesting it will ignore a faster than expected rise in headline inflation because the rise will mainly reflect temporary price increases in volatile items.
The central bank held its benchmark interest rate at 1 percent, as expected, extending a 3-1/2 year freeze on borrowing costs.
Repeating language it used in its last rate announcement on March 5, the bank said "the downside risks to inflation remain important" and risks associated with near-record high household debt remain elevated. These risks are sufficiently balanced so that the bank sees no need to change its stance on monetary policy.
"The timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks," it said in a statement.
In a Reuters poll published on April 9, economists predicted the bank would not make a move on rates until the third quarter of 2015, when they forecast it would opt for 25 basis point rise.
The biggest change in the bank's forecasts was contained in its quarterly Monetary Policy Report, which was also released on Wednesday. In the report, the bank sees a faster than expected rise in Canada's headline inflation rate.
The headline rate has been below the bank's 2 percent target for nearly two years and is the main reason Bank of Canada Governor Stephen Poloz adopted a more dovish tone last October.
The bank now sees the rate hitting 2 percent in the first quarter of 2015 and staying there through 2016. In January, the bank forecast it would not reach 2 percent until the end of next year.
However, the bank suggested it would not react to the increase in that inflation measure because it will mainly reflect temporary upward pressure from higher gasoline and natural gas prices and a weaker Canadian dollar.
Core inflation, which strips out volatile items, is seen taking longer to regain momentum due to excess slack in the economy and intense retail competition. The bank's projections for core inflation are largely unchanged from January and show a return to 2 percent in the first quarter of 2016.
Total inflation will stay at about 2 percent because as the effect of higher fuel prices fades, the downward pressure from retail competition is expected to persist for another 1-1/2 years and excess capacity will be absorbed.
"The bank uses core inflation as an operational guide to look through inflation movements that are likely to be temporary," it said.
"Excess supply must be absorbed to prevent total CPI inflation from falling back below the 2 percent target once the effects of volatile components unwind."
The bank said it expected the drivers of growth and inflation in Canada to gradually strengthen as the United States recovers from a weather-related slowdown. But its outlook for exports and business investment remain weaker than in its January forecasts.
It cut its forecast for Canadian economic growth in the first quarter to 1.5 percent from 2.5 percent, annualized, but held its annual growth forecasts for 2014 and 2015 unchanged at 2.5 percent.
It raised its inflation forecast for the first quarter to 1.3 percent from 0.9 percent.
Comments
Comments are closed.