The Bank of Canada held its overnight rate steady at 1% as expected, the 16th straight month that rates have been on hold. The statement did not give much in the way of clues as to the prospect for interest rates going forward, but ended its statement saying that there is considerable monetary policy stimulus in Canada.
The statement said that the overall outlook for the Canadian economy is little changed from October, but it did revise upward its expectations for growth for 2011 to 2.4% from 2.1%.
From Statement: While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment.
- Prolonged uncertainty about the global economic and financial environment is likely to dampen the rate of growth of business investment, albeit to a still-solid pace.
- Net exports are expected to contribute little to growth, reflecting moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.
- In contrast, very favorable financing conditions are expected to buttress consumer spending and housing activity.
- Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.
The Bank estimates that the economy grew by 2.4 per cent in 2011 and projects that it will grow by 2.0 per cent in 2012 and 2.8 per cent in 2013. While the economy appears to be operating with less slack than previously assumed, given the more modest growth profile, the economy is only anticipated to return to full capacity by the third quarter of 2013, one quarter earlier than was expected in October.
There are some positives to take away from that including a faster return to full capacity and signs that households are continuing to spend - we saw that in recent retail sales, vehicles sales, wholesale sales data. The main concern is that The recession in Europe is now expected to be deeper and longer than the Bank had anticipated in October.
On the inflation front, the profile for inflation is marginally firmer and that several significant upside and downside risks are present in the inflation outlook.
I have argued that the BOC will be the first developed nation central bank to raise interest rates in 2012, and today's report did not really change the thinking there, though it did not buttress the case.
A survey of economists by Reuters prior to the BOC decision showed a majority pushing rate hike expectations back to the 1st quarter of 2013.
From Reuters: The Reuters poll of 41 economists and strategists released on Tuesday showed the median forecast for the next interest rate hike was pushed back by three months to the first quarter of 2013 from the fourth quarter of 2012 projected in a November poll.
Of the contributors, 32 see a rate hike happening after the second quarter of 2012. Five forecasters - BNP Paribas, Capital Economics, Goldman Sachs, IFR Markets and ING Financial - predicted a rate cut across the forecast horizon, up from only three forecasters in the last poll. All five expect the cut by mid-2012.
Therefore we will continue to monitor the data coming out of Canada, especially inflation. We get the latest reading on Friday. We also want to keep a close eye on where oil prices head, as well as general risk-sentiment.
Foreigners Snatch Up Canadian Securites
Lastly, foreign investors see something they like in Canada as total foreign purchases of Canadian bonds and securiteis surged by C$14.99 in November.
From Reuters: Foreigners dramatically stepped up their purchases of Canadian securities in November, snapping up C$14.99 billion ($14.84 billion) worth, compared with just C$3.85 billion in October, Statistics Canada said on Tuesday.
The inflow of funds from abroad was the highest since the C$15.32 billion recorded in May 2011. Canada is an attractive target for investors seeking good returns amid the economic crisis in Europe and a challenged U.S. economy. That said, foreign purchases in the first 11 months of 2011 totaled C$88.17 billion, down from C$107.25 billion in the same 11-month period of 2010.
Overseas investors bought C$6.22 billion of Canadian bonds, primarily in secondary market purchases of government bonds and acquisitions of new corporate bond issues. For the fifth month running, foreigners bought money market paper, this time to the tune of C$5.67 billion. They also bought C$3.09 billion of Canadian corporate shares, sharply higher than the C$182 million in October.
That is a sign of investor confidence that Canada's economy and by extension the country's companies are headed in the right direction, and those inflows should help to support a stronger CAD as well. We continue to favor the CAD versus the European higher yielders - the EUR and GBP.