Bank of Canada cautious on growth, warning Ukraine tensions are stoking global uncertainty

Canada’s economy is performing slightly above forecasts, but there are new storm clouds in Eastern Europe and emerging markets.

For that reason, the Bank of Canada on Wednesday again kept its trendsetting interest rate on hold.

Little surprise there. The central bank’s overnight rate — the target level for loans between commercial institutions — has not budged from a near-record low 1% since September 2010.

Most economists still don’t expect any movement on rates until at least mid-2015 — and that adjustment is more likely to be up, not down, if the economy shows stable growth and inflation picks up...

The Bank of Canada said “the fundamental drivers of growth and inflation in Canada continue to strengthen gradually, as anticipated.”...

But policymakers, led by governor Stephen Poloz, who in October dropped the bank’s long-standing bias toward an eventual rate increase, limited their outlook for inflation, saying price rises would remain below the bank’s 2% target “this year.” The January statement said inflation would hit that target “in about two years.”

Also, the bank said the global economy is “evolving largely as expected.”

“The United States is still expected to lead the acceleration in advanced economies, although recent data have been softer, largely owing to weather effects,” it said.

“Volatility in global financial markets has increased somewhat, reflecting buoyant market conditions in most advanced economies and increased risk differentiation among emerging markets. More recently, tensions in Ukraine have added to geopolitical uncertainty.”...

The so-called “rebalancing of the economy toward business investment and net exports [away from consumer spending] continues to be elusive,”..

Canada’s gross domestic product grew at an annualized 2.9% in the last quarter of 2013, better than many forecasts, and an improvement on the 2.7% gain between July and September. Statistics Canada revised second-quarter growth to 2.2% from an earlier estimate of 1.6%, and increased the first-quarter data to 2.9% from 2.3%.

For all of 2013, GDP grew 2%, compared to average forecasts of around 1.7%. But for December alone, the economy actually contracted by 0.5% because of extreme weather conditions that also cut into retail sales...

This has been excerpted from the 5 March 2014 article by the Financial Post, and is available in its entirety at: http://business.financialpost.com/2014/03/05/bank-of-canada-keeps-neutral-view-on-1-rate-as-growth-quickens/