• The forward guidance statement reiterated that "as long as" there is significant slack, low inflation and improving household balance sheet conditions, the current policy support will remain

  • The bank says that "over time" as conditions normalize a "gradual normalization of policy interest rates can also be expected."

  • Today’s statement reconfirmed that the Bank will look through the choppiness in the economic data with the expectation that the economy’s momentum will shift into a higher gear thereafter. In July 2013, the Bank estimated that the gap would close around mid-2015. While today’s statement incorporated a slightly less optimistic view of the near-term outlook for US growth and acknowledged that in turn, a firming in Canadian export and business investment was evolving slower than projected, the main thresholds required for the Bank to start to reduce the amount of stimulus remained intact. On balance, by highlighting that the output gap will begin to narrow in 2014 and that imbalances in the household sector are likely to continue to dissipate, today’s statement supports our expectation that the Bank will begin to pare back the amount of stimulus in the second half of 2014

The Bank of Canada made no change to the policy rate today as was universally expected. The statement reiterated that there are three factors supporting the case for the current "considerable monetary policy stimulus" to remain in place: muted inflation, significant economic slack, and the constructive evolution of household balance sheet imbalances. As these factors normalize, "a gradual normalization of policy interest rates can also be expected."

 

The statement acknowledged that the global economy was expanding as the Bank expected; however, US growth has been slightly slower while Europe and Japan showed improvement. The Bank acknowledged that geopolitical events were exerting upward pressure on oil prices although overall commodity prices have been stable.

 

Although the global economy is expanding as expected, the attendant effect on Canada has been less favourable with the anticipated strengthening in business investment and export growth not, as yet, playing a strong role. Canada’s housing market has proven to be somewhat firmer than expected; however, this has not fuelled a pickup in credit demand, and the Bank expects recent increases in mortgage rates to support a continuation of the trend toward improvement in household imbalances.

 

The 1.7% annualized increase in second quarter gross domestic product (GDP) exceeded the Bank’s forecast; however, it confirmed that the economy was affected by one-off factors including flooding in Alberta and a construction industry strike in Quebec as the growth rate was lower than the 2.2% annualized gain recorded in the first quarter of 2013. Despite this overshoot in the second quarter, the Bank still looks for the economy to grow at a rate in line with its forecast contained in the July Monetary Policy Report thereby suggesting that policymakers may have tempered the magnitude of the rebound in the real GDP growth forecast for the third quarter. In July, the Bank projected real GDP growth of 1.8% in 2013, and 2.7% in 2014 and 2015. These forecasts are in line with our own projections. Against the backdrop, the Bank looks for the output gap to begin to narrow in 2014.

 

Today’s statement reconfirmed that the Bank will look through the choppiness in the economic data with the expectation that the economy’s momentum will shift into a higher gear thereafter. In July, the Bank estimated that the gap would close around mid-2015. While today’s statement incorporated a slightly less optimistic view of the near-term outlook for US growth and acknowledged that in turn, a firming in Canadian export and business investment was evolving slower than projected, the main thresholds required for the Bank to start to reduce the amount of stimulus remained intact. On balance, by highlighting that the output gap will begin to narrow in 2014 and that imbalances in the household sector are likely to continue to dissipate, today’s statement supports our expectation that the Bank will begin to pare back the amount of stimulus in the second half of 2014.


Written by:

Dawn Desjardins, Assistant Chief Economist, RBC Economics


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