07/17/2012 09:20 EDT | Updated 07/17/2012 09:21 EDT

BofC Interest Rate Decision July 2012: Panel Warns Canadian Economy Not As Strong As Thought


OTTAWA -- The Bank of Canada says the economic recovery is being blown slightly off course by a perfect storm of global turbulence that is affecting all major economies, requiring the central bank to keep interest rates low awhile longer.

The central bank said its benchmark policy setting will remain at one per cent until at least the next policy meeting in September, which should keep short-term borrowing costs at near record lows throughout the summer.

But the bank ratcheted down its prediction for the economy from the relatively rosy 2.4 per cent growth rate in 2012 and 2013 to 2.1 per cent and 2.3 per cent for the two years, respectively.

More aggressive expansion now won't come until 2013 when the economy is forecast to grow by 2.5 per cent.

And the economy won't return to full capacity until the second half of 2013, about six months later than the bank monetary policy panel, which is led by governor Mark Carney, thought in April.

The new projections put the central bank closer in line with the private sector economist consensus and virtually on the same page as the International Monetary Fund's call on Monday for 2.1 per cent and 2.2 per cent growth in 2012 and 2013.

"While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,'' the policy panel said in statement.

"Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions (interest rates).''

However, it notes that the global slowdown is restraining exports and pushing down commodity prices, sapping Canadian incomes and wealth. Meanwhile, record-high household debt is restraining spending, housing activity is expected to slow from record levels, and governments have taken themselves out of the stimulus game with austerity budgets.

The interest rate announcement was pretty much anticipated by private sector economists. It now means the bank will have kept the benchmark setting at one per cent two full years, and if analysts are correct, it probably will do some for a third.

The mild surprise was that the central bank did not change its forward-looking advisory to take near-term future rate hikes off the table.

Instead the bank repeated the mantra that ``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.''

That day seems a long way off given what is happening around the globe. Across the board, the bank says, conditions are worse than they were a few short months ago.

The United States recovery continues but it is weaker. In China and other emerging economies, the deceleration of growth has been greater. Developments in Europe now point to a renewed contraction.

"This slowdown in global activity has led to a sizable reduction in commodity prices,'' which hits Canada's resource sector, particularly oil exports, the bank says.

"Global financial conditions have also deteriorated since April, with periods of considerable volatility,'' it adds.

Finally it issues a warning: "The bank's base case projection assumes that the European crisis will continue to be contained, although this assumption is subject to downside risks.''

The bank does not say what will happen if Europe's debt crisis leads to a financial system collapse, as happened in the fall of 2008, but the IMF on Monday pronounced such an outcome as catastrophic and capable of sending the global economy back into recession.

The Bank of Canada will spell out more fully its view of the global and Canadian outlook on Wednesday, when it releases the quarterly monetary policy review.

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