Bank of Canada holds rate steady as global storm clouds gather

OTTAWA — In the face of mounting economic uncertainty, the Bank of Canada on Wednesday once again left its key lending rate on hold, as expected.
“Global growth prospects are unfolding largely as the bank projected in its July Monetary Policy Report,” the central bank said its statement, “with a widespread slowing of activity across advanced and emerging economies.”
The bank held its trendsetting interest rate at 1%, where it has stood since September 2010.
But as the U.S. Federal Reserve and other global central banks contemplate further rounds of easing, Canada repeated what it has been saying for months – that the time for removing stimulus could be near.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term,” the bank said in its announcement, using language identical to its last two rate statements.
“There has been no significant change in the economic backdrop since July, and the bank’s bias is so mild that it can almost be regarded as aspirational rather than any type of commitment,” BMO Capital Markets said in a note ahead of the bank’s announcement.
The central bank’s rate announcement comes after Tuesday night’s election victory by the Parti Québécois, led by Pauline Marois. Still, the separatist party only narrowly defeated Jean Charest’s incumbent Liberals, making another referendum on independence unlikely any time soon.
The vote is also unlikely to affect markets, the Canadian dollar most importantly. The loonie was little changed Wednesday morning.
Bank of Canada governor Mark Carney and his policy advisors made no mention of the election outcome in Wednesday’s rate announcement.
Prime Minister Stephen Harper, in a statement late Tuesday, said Ottawa does not believe “that Quebecers wish to revisit the old constitutional battles of the past.”
“Our government will remain focused on jobs, economic growth and sound management of the economy,” he said. “We believe that economic issues and jobs are also the priorities of the people of Quebec.”
Bigger concerns for Canada remain: The still-unresolved European debt and banking crisis, as well as the weak recovery in the United States and slowing output elsewhere — in particular China, the world’s second largest economy after the U.S.
“The economic expansion in the United States continues at a gradual pace,” the Bank of Canada said in Wednesday’s rate announcement.
“Europe is in recession and its crisis, while contained, remains acute. In China and other major emerging economies, growth is decelerating somewhat more quickly than expected from previously rapid rates.”
Canada’s economy, meanwhile, continues to show modest growth. Gross domestic product rose 1.8% on an annualized basis in the second quarter, in line with the Bank of Canada’s most recent projections.
For the year, the bank expects GDP growth of 2.1%, followed by a 2.3% advance in 2013 and 2.5% in 2014.
Employment growth in Canada has been relatively disappointing, however, as has U.S. labour market. Statistics Canada will report the latest employment numbers for Canada on Friday.
Still, reiterating July’s statement, the bank on Wednesday said that “while global headwinds continue to restrain economic activity, underlying momentum remains at a pace roughly in line with the economy’s production potential.”
European concerns will be front and centre on Thursday, when the European Central Bank issues its monetary policy statement. No change is expected, but the central bank could present its long-awaited plans to buy bonds from Spain and Italy to ease the debt pressure in those countries.
And following its Sept. 12 and 13 meeting, the U.S. Federal Reserve could unveil its latest plan to stimulate that economy, most likely announcing another round of asset purchases.