The Bank of Canada pledged on Wednesday to keep its benchmark interest rate on hold as long as there is economic slack, weak inflation and households are managing debt carefully, but it also made it clear its next rate move will likely be a hike. The central bank's first policy decision under new chief Stephen Poloz, who took over in June, delivered roughly the same message as those made under his predecessor, Mark Carney, over the past year: that it is just a matter of time before borrowing costs start to rise.
Poloz, however, was more explicit in stating that the continuation of steady rates depends on three key factors. "As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate," the bank said.
"Over time, as the normalisation of these conditions unfolds, a gradual normalisation of policy interest rates can also be expected, consistent with achieving the 2 percent inflation target," it added. The bank did not provide specific thresholds for triggering a rate increase.
It has held its overnight rate at 1 percent since September 2010, the longest period between rate changes since the 1950s. Since April 2012 it has been hinting at rate hikes to come, making it the only central bank in the Group of Seven major economies to have a hawkish bias, albeit a mild one. The bank has said an increase is not imminent, and market players don't expect a move until 2014. Some economists had raised the possibility that Poloz would be more dovish and drop any mention of future rate hikes.
The bank cut its forecast for second-quarter economic growth sharply on Wednesday - to 1 percent from 1.8 percent - largely due to the impact of catastrophic flooding in Alberta and a strike by construction workers in Quebec. But it said growth in the third quarter would more than compensate for that decline. It forecast third-quarter growth of 3.8 percent, up from its previous estimate of 2.3 percent. Therefore, it said, the volatility of the two quarters would not play into its policy choices.
The Alberta flood will cut 0.7 percentage points from second-quarter annualised growth, while the Quebec strike will cut 0.6 points, the bank estimated. Rebuilding in Alberta will boost growth by 1 percentage point in the third quarter, while the end of the Quebec strike in early July means third-quarter GDP will get a 0.8 point lift. The bank said the economy will grow 1.8 percent this year, up from its previous estimate of 1.5 percent. Growth will come in at 2.7 percent in both 2014 and 2015, it estimated.
The overall growth outlook is little changed from the bank's April forecast, and the bank continues to expect the economy to return to full capacity and inflation to rise to its 2 percent target by mid-2015. One key change in language from previous statements is that the bank no longer referred to the "persistent strength of the Canadian dollar", reflecting a weakening of the currency since the Monetary Policy Report the bank released in April.