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Weak data test Bank of Canada’s optimistic outlook

16:44 EST Monday, May 23, 2016

Last time we heard from the Bank of Canada, it was raising its 2016 economic forecasts and expressing cautious optimism about the Canadian economy. When the central bank issues its regularly scheduled interest-rate decision this week, we’ll get a sense of whether the economy’s steady stream of missteps has changed its course.
The bank will issue its rate announcement Wednesday, but the decision itself will not be the news. It’s all but a foregone conclusion that the bank will leave its key interest rate unchanged at 0.5 per cent, where it has sat since last July, when the bank made its second quarter-percentage-point rate reduction of 2015.
But in the midst of a spring filled with unimpressive economic indicators, the statement accompanying the rate decision will be far from a non-event. Monetary policy watchers will be combing through the text for any signs that the bank’s optimism about a pickup in the economy this year has been shaken.
The tone of the rate statement could be especially big news for the Canadian dollar. It fell to six-week lows last week after the U.S. Federal Reserve released minutes from a recent policy meeting that suggested the Fed is closer to raising U.S. rates than the markets had previously expected, which triggered buying of U.S. dollars at the expense of the Canadian and other currencies. Any hint, even a small one, that the Bank of Canada rates might be on hold for even longer than expected, or perhaps even heading in the opposite direction from the Fed, could fuel more selling of the loonie.
One thing we absolutely will not get from the bank, however, is an actual update of its economic forecasts. While the bank sets rates eight times a year, it only issues its quarterly Monetary Policy Report, which contains its economic projections, in conjunction with half of those rate decisions. This is one of those between-MPR rate announcements; the next forecast update won’t come until mid-July.
As a result, observers will have to read between the lines of the rate announcement – which typically runs at a trim half-dozen paragraphs or so – to gauge how the bank’s views on the economy have shifted since its mid-April MPR.
The bank’s outlook in April was coloured by an impressive start to 2015, which had prompted it to significantly upgrade its economic growth projections for the first quarter and for 2016 as a whole. But the economy sputtered to the end of the first quarter, and carried little momentum entering the second quarter. The economy in the United States, Canada’s biggest export market, has also looked persistently lacklustre in recent months, raising doubts about the export demand that was expected to be a critical driver of Canadian growth this year.
The Bank of Canada had already anticipated that the economy would take a second-quarter pause from its unsustainably quick start to the year. It forecast only a modest 1-per-cent annualized growth rate for the second quarter – only about one-third of the estimated first-quarter pace. But in light of the discouraging economic data to end the first quarter, private-sector forecasters now expect near-zero growth in the second quarter.
Many experts have argued that the appreciation of the Canadian dollar over the past four months is weighing on the country’s exports, making them less attractive in foreign markets, including the United States, where demand has been looking fragile anyway. The Bank of Canada acknowledged this in the April MPR, when it raised its assumption for the currency for the purposes of its economic forecasts to 76 cents (U.S.), up 4 cents from previous projections. The currency did appreciate modestly in the weeks after the April forecast, but with its recent losses, it is now trading close to the bank’s 76-cent assumption; it likely has done little, if anything, to change the central bank’s thinking.
On the other hand, another key variable – the price of oil – has increased nearly 15 per cent since mid-April, offering a meaningful boost to the country’s beleaguered energy sector and energy-producing regions. The bank may hint at some upside to its economic outlook from the improved oil climate. The bigger question will be whether the price, now approaching $50 (U.S.) a barrel for the North American benchmark crude grade, is yet high enough to entice investment back into the sector. One of the Bank of Canada’s big themes in its 2016 outlook has been the precipitous drop in business investment in oil and gas – which it has projected will be 60 per cent lower in 2016 than in 2014 – and the massive impediment that poses to the economy’s growth prospects.
But the central bank might also address the Alberta wildfires as a temporary drag on growth in the second quarter, given the sizable disruption to oil sands production. Observers will be looking for any indication of how big a hit on growth the central bank anticipates from the fires, and how much and how quickly it expects the economy to rebound once the affected region restarts production and begins to rebuild from the heavy property damage.

Bank of Canada may sound dovish in May, rate hike expected next year: Poll

The Bank of Canada is expected to strike a more dovish tone in its May policy statement, partly due to a still-raging wildfire in Alberta that has disrupted oil production, but a Reuters poll suggests it will not cut interest rates again.

The survey of more than 40 economists this week showed the central bank will probably not move to adjust rates again until the third quarter of next year, when it is expected to raise rates by 25 basis points to 0.75 percent.

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World economy faces risks, but growth likely: Bank of Canada

Allison Lampert
09:58 EST Wednesday, May 11, 2016

MONTREAL — While the global economy faces a number of risks, including the potential for a shock from China, the most likely scenario is that growth continues, with some headwinds starting to slowly fade, a senior Bank of Canada official said on Wednesday.
Nonetheless, the world economy’s potential growth will be lower than it was 10 years ago, partly due to demographic shifts that policy cannot fully address in the short term, Senior Deputy Governor Carolyn Wilkins said.
“There are a lot of downside risks, but I would say though that the most likely thing is that the economy is going to keep growing,” Wilkins told a panel.
“There’s not the typical inflation pressures you see that would result in very abrupt increases in interest rates and that’s often what triggers downturns.”
The Bank of Canada cut interest rates twice last year to cushion the shock of cheaper oil. While the bank is expected to hold steady when it meets later this month, odds of another cut this year have risen following disappointing trade data and oil production disruptions due to wildfires in Alberta.
One risk the Bank of Canada thinks about is the potential for a shock out of China, which affects Canada not only through demand for exports but also the effect China has on commodity prices, Wilkins said.
While the central bank expects China will experience slower but more sustainable growth, the risks are “pretty important,” she said.
But there are signs that some headwinds facing the global economy are dissipating, Wilkins said, pointing to the U.S. recovery.
“It’s not going to go in a straight line but we see it recovering,” Wilkins said. A stronger U.S. economy is key for Canada’s export outlook.
“I think the focus is on the downside risks because there just seem to be so many of them and we try to take some of those on board so we have a balanced forecast,” Wilkins added.
With the potential for world economic growth lower, the neutral interest rate is also going to be lower and is in the range of 2.75 to 3.75 percent for Canada, Wilkins said.

Fed keeps rates unchanged, signals faith in U.S. economy

Lindsay Dunsmuir and Jason Lange
14:04 EST Wednesday, Apr 27, 2016

WASHINGTON — The Federal Reserve kept interest rates unchanged on Wednesday but signaled confidence in the U.S. economic outlook, leaving the door open to a hike in June.
The U.S. central bank’s policy-setting committee said the labor market had improved further despite a recent economic slowdown and that it was keeping a close eye on inflation.
It added that global economic headwinds remained on its radar, but removed a specific reference from its last policy statement to the risks they posed.
“The committee continues to closely monitor inflation indicators and global economic and financial developments,” the Fed said in a statement following a two-day meeting.
It kept the target range for its overnight lending rate in a range of 0.25 per cent to 0.50 per cent. The Fed hiked rates in December for the first time in nearly a decade.
For the third consecutive meeting, it did not include any mention of the balance of risks to the economy. However, the Fed noted that while growth in household spending had moderated, households’ real income had risen at a “solid rate” and consumer sentiment remained high.
Inflation has picked up recently, but the Fed on Wednesday said it was expected to remain low in the near term in part because of earlier declines in energy prices. It added that it remained confident inflation would rise to its 2 per cent target over the medium term.
Despite strong job gains and an unemployment rate of 4.9 per cent, Fed policymakers have previously said they would proceed cautiously in raising rates again due to the uncertainty in the world economy and a lack of inflation pressures at home.
A global equities sell-off and the tightening of financial markets earlier this year largely on concerns of a slowdown in China prompted the Fed’s policy-setting committee last month to dial back rate hike expectations for the year.
Fed policymakers currently project two rate hikes in 2016, compared to the four hikes forecast in December. Stocks have continued to rise since the Fed’s March policy meeting and investors’ nerves have been soothed by an apparent pick-up in China’s economy.
Oil prices also have rallied from a near-collapse earlier this year and the U.S. dollar has shed some of its strength from last year. A robust dollar last year acted as a drag on U.S. manufacturing and other sectors in the economy.
Other major central banks have been grappling with ways to deal with lackluster economies, including the adoption of negative interest rates.
For its part, the Fed is concerned that with interest rates still close to zero it would have to rely on more unconventional policy tools should the economy take a turn for the worse.
An initial estimate of U.S. first-quarter gross domestic product is expected on Thursday to show tepid growth. Kansas City Fed President Esther George dissented for the second consecutive meeting.

Poloz sets high bar for another Bank of Canada rate cut

08:47 EST Tuesday, Apr 26, 2016

OTTAWA — Bank of Canada Governor Stephen Poloz has set a high bar for cutting interest rates again.
It would take a “shock of some significance” – such as another economic setback in the United States or China – for the central bank to consider more rate relief, Mr. Poloz said Tuesday.
The bank cut its overnight rate twice last year after the global commodities price crash, which has decimated jobs and investment in Canada’s oil patch. But the rate has been fixed at 0.5 per cent since last July in spite of further deterioration in both the Canadian and global economies.
The new Liberal government’s move in its March budget to invest $25-billion in infrastructure and families over two years “more than offset” the renewed downward pressure on the economy, according to Mr. Poloz. In its April monetary policy report, the bank estimated that federal stimulus would boost gross domestic product by 0.5 percentage points this year and 0.6 points in 2017.
Canada’s top central banker said it would take a major delay in getting the economy back to full capacity for the bank to revert to an easing bias on rates. Those shocks could include a major slowdown in the global economy brought on by weaker growth in China or the U.S., Canada’s largest trading partner.
“It would be another negative shock but it would need to be obviously a shock which is of some significance or an accumulation of other shocks,” Mr. Poloz told reporters after a speech to Wall Street financial professionals in New York.
He was quick to point out that either of these scenarios are built into the bank’s current forecast. “Those are just shocks that economists think about,” he explained.
Mr. Poloz said he expects the Canadian economy to get up to “full speed this year.” But he cautioned that it will take another full year or more for the economy to absorb any “excess capacity,” including laid-off workers and idled plant production.
Canada is “fortunate” that the federal government is spending money on fiscal stimulus because it balances out the waning impact of monetary policy, he pointed out.
Mr. Poloz dedicated most of his speech to explaining a troubling drop-off in global trade growth since the 2008-09 financial crisis.
He warned that trade growth around the world is unlikely to regain the torrid pace of the years before the global financial crisis. The days of 7-per-cent annual growth in international trade are gone, perhaps for good, Mr. Poloz said.
“The rapid pace of trade growth that prevailed in the two decades before the crisis was the exception, and not the rule,” Mr. Poloz argued.
That’s because much of the slowdown is due to the end of a long period of global integration – as multinationals specialized and built global supply chains, countries formed powerful new trading blocs and China joined the global economy.
“The big opportunities for increased international integration have been largely exploited,” Mr. Poloz explained. “China can join the [World Trade Organization] only once.”
Mr. Poloz nonetheless put a positive spin on the outlook for trade. Roughly half the post-crisis slowdown in trade is due to cyclical economic weakness, particularly lower business investment, most of which will be reversed.
“The weakness in trade we’ve seen is not a warning of an impending recession,” he said. “Rather, I see it as a sign that trade has reached a new balance point in the global economy, and one that we have the ability to nudge forward.”
Some analysts said his comments suggest Mr. Poloz remains a trade optimist. He could have said Canadian exports will remain volatile, Bank of Nova Scotia economists Derek Holt and Dov Zigler said in a research note. “Instead, [he] walked on the sunnier side of the street.”
Countries can bolster trade by striking new free-trade agreements, such as the Trans-Pacific Partnership, and boosting productivity, according to Mr. Poloz. Other sources of trade growth will come from the emergence of new, more productive companies – a process that has already begun, he added.