BoC staying put on interest rates, but likely to temper enthusiasm for growth

OTTAWA – The Bank of Canada is widely expected to keep its benchmark interest rate at one per cent this morning, guaranteeing it will have been at that super-low level a full two years.

Bank governor Mark Carney began warning of the dangers of “living low for long” as far back as 2010, but each time he has appeared on the brink of raising rates, outside forces have stayed his hand.

That is the predicament he finds himself in today as well, say analysts, who note the governor signalled a tightening bias in April, only to have to back off part way in June.

Now that the International Monetary Fund has downgraded global growth to the end of 2013, economists wonder if Carney and his policy-setting panel will back off the rest of the way and return to an officially “neutral” stance.

Bank of Montreal economist Douglas Porter says the case for going neutral is that almost all major central banks in the world have recently moved to inject more stimulus, and Canada’s economy has disappointed so far this year.

Lastly, Finance Minister Jim Flaherty took action on one of Carney’s worries — Canada’s hot housing market and high household debt — by tightening mortgage and borrowing rules yet again.

And so it is widely expected there will be no change to interest rates in the 9 a.m. announcement, nor any strong signal of a move any time soon.

“Given the low inflation environment, we have pushed out (an) interest rate hike a few months later than in last month’s forecast, to the second quarter of next year (2013) rather than the first,” said Arlene Kish, chief economist with Global Insight.

The C.D. Howe monetary policy panel of 10 private sector economists and academics hold a similar view. They recommended last week that the interest setting remain at one per cent for at least another six months.

What is likely to change in the announcement is the central bank’s estimate of the recovery’s progress.

In April, the Bank of Canada went out on a limb with a near-term consensus for growth expectations of 2.4 per cent in both 2012 and 2013. But the economic universe, both abroad and in Canada, haven’t unfolded exactly as the bank thought.

The European crisis deepened rather than calmed, the U.S. recovery hit a road bump rather than accelerated, and growth in the emerging markets slowed more than predicted.

On Monday, the IMF put out a new forecast predicting global growth will slow following a fast start to the year, dropping 0.2 percentage points to 3.9 per cent in 2013. And that’s if Europe doesn’t implode, the body added — far from a sure bet.

Economist Jimmy Jean of Desjardins Capital Markets points out that at 2.4 per cent, the Bank of Canada’s outlook is now at or near the top of economists’ consensus, an uncomfortable place for the bank to be, unless it knows something nobody else does.

“The last time this occurred was in the summer of 2011 and the (bank) would eventually lower its outlook,” he said. “We expect to see the same, accompanied by a downward reassessment of the U.S. outlook and a likely weaker profile for Canada’s net trade sector.”

Analysts don’t expect the bank to retreat altogether into the pessimist camp, however, and it has some cover.

The first month of the second quarter saw a healthy output rise of 0.3 per cent, and last week’s business outlook survey found confidence among Canada’s corporate sector surprisingly resilient for sales growth and hiring intentions.