OTTAWA — There has been a sea change at the Bank of Canada.
No longer are policymakers setting a specific monetary course for interest rates. Instead, for the first time in 18 months, they have dropped any reference to borrowing costs eventually rising — adopting a neutral position and waiting to see which way economic winds blow.
What hasn’t changed, however, is the central bank’s biggest policy lever — its benchmark lending rate, which has remained at a near-record low of 1% since September 2010 and which has been locked in by lower-for-longer inflation and weaker-than-forecast growth.
Those policymakers — now under the leadership of Stephen Poloz, who replaced Mark Carney in June — on Wednesday kept their key rate as is, and where it will likely remain until mid- or late 2015.
They also downgraded growth estimates for Canada, despite some positive economic signs coming out of Europe and Asia, tempered by ongoing uncertainty over budget crises in the United States.
Any rate change will be “very clearly later than we thought,” Mr. Poloz, 58, told reporters in Ottawa.
But the bank governor would not comment on what direction — up or down — rates will eventually take. Instead, Mr. Poloz said the process of balancing future data will be not a matter of “engineering” but “ risk-management.”
Canada’s economy is forecast to grow by 1.6% this year, down from the bank’s July outlook of 1.8%. For 2014, the estimate has fallen to 2.5% from 2.8% ahead of 3% in 2014, unchanged from July.
Global growth, however, is expected to remain stable at 2.8% this year, but advance at a weaker pace in 2014 — 3.4% compared to the earlier estimate of 3.5% — and also slower in 2015 — 3.6% rather than 3.7%.
“There’s a lot of uncertainty around the key things that one must know in order to make those decisions, and so it really changes the policy formulation process from one of engineering to one of risk-management,’ he said.
“We have balanced the risks of where we are today,” he said. “If we were to receive more data flow that was more negative . . . then we would need to rethink that balance.”
Craig Alexander, chief economist at TD Economics, said, “I don’t think the fundamental view of where monetary policy in Canada is headed has really changed.”
“I still think the most likely direction for rates is up,” he said. “[But] the bank is not going to give you specific guidelines that says, ‘If this happens, then we do this’.”
In its quarterly Monetary Policy Report, released along with its interest rate statement, the central bank said Canada’s economy will likely grow by 1.6% this year, down from the bank’s July outlook of 1.8%.
For 2014, the estimate has fallen to 2.5% from 2.8% ahead of 3% in 2014, unchanged from July.
The big picture, however, is for global output to remain stable at 2.8% this year, but advance at a weaker pace in 2014 — 3.4% compared to the earlier estimate of 3.5% — and also slower in 2015 — 3.6% rather than 3.7%.
“The global economy is expected to expand modestly in 2013,” Mr. Poloz said.
“However, its near-term dynamic has changed and the composition of growth is now slightly less favourable for Canada,” he said.
“In Canada, uncertain global and domestic economic conditions are delaying the pickup in exports and business investment, leaving the level of economic activity lower than the bank had been expecting.”
As a result, the bank dropped its reference to future rate movements for the first time since April 2012.
That so-called “forward guidance” highlighted the ongoing slack in economic output, along with muted inflation and concerns over high levels of consumer borrowing — all of which would need to be corrected before rates could rise “over time.”
“If the Bank of Canada is unlikely to move interest rates up over the next year, you have to actually ask ‘How much guidance are you getting from the guidance’,” said TD’s Mr. Alexander.
Beside, he said, “I just don’t think a small easing of monetary policy from current levels is really going to change investment or consumption.”
Meanwhile, Mr. Poloz now appears less concerned about household debt, telling reporters that while consumer spending “remains solid, slower growth of household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances.”
Still, the elephant in the room is Canada’s export market, which has so far been slower to move into other markets, as the bank had envisioned as part of a rotation away consumer-supported growth.
With the U.S. still our biggest trading partner, the continuing political turmoil over America’s spending and debt levels have dampened enthusiasm over increased shipments of goods to that country.
The Bank of Canada has lowered this year’s forecast for the U.S. to 1.5% from 1.7%, and cut next year’s outlook to 2.5% from 3.1, while raising the projection for 2015 to 3.3% from the 3.2% mark in July’s MPR — on the hopes that fiscal concerns will have dissipated by then.
The weaker overall global picture has been somewhat tempered by a stronger-than-anticipated rebound in Europe, and steady gains in Japan and China.
Importantly, policymakers now see Canada’s economic output gap — the difference between potential capacity and actual production levels — closing at the end of 2015, pushed back from the previous timeline of mid-2015.
Closure of the gap is expected to coincide with Canada’s inflation rate returning to 2%, which is the midway point of the bank’s 1-to-3% target. The overall consumer price index, as reported by Statistics Canada, was 1.1% in September.
“Although the bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance,” Mr. Poloz said.
Even so, the bank “must also take into consideration the risk of exacerbating already-elevated household imbalances.”