Today's Monetary Policy Report (MPR) filled in the gaps in yesterday's
statement, which accompanied the Bank's announcement that the policy
rate would be held at 1% for the third consecutive meeting.
Yesterday's announcement alluded to a "somewhat faster" pace of global
growth than the Bank's projection in its October MPR. The announced
upgrades to the Bank's views resulted in the world growth forecast
rising to 4.0% in 2011, up from the Bank's previous projection of
3.5%. The 2012 world growth forecast upgrade was more subdued with
only a 0.1 percentage point (pp) increase to 3.9%. The Bank also
revised up its forecast for the U.S. economy, boosting the 2011 growth
rate by 1 pp to 3.3% while trimming the 2012 forecast by 0.1 pp to
3.2%.
The upgrades to the U.S. forecast reflected the effect of a
strengthening in activity late in 2010 as well as the announcement of
additional monetary and fiscal policy stimulus that occurred after the
Bank's October forecast was made. The Bank assessed that the U.S.
stimulus packages would be positive for Canada's outlook although
estimated a slight 0.2 pp add to Canadian growth in 2011 and a 0.1 pp
increase in 2012. Today's report confirmed that the Bank expects
Canada's economy to grow by 2.4% in 2011 and 2.8% in 2012. These
forecasts are broadly in line with the consensus projections released
earlier this month that showed private forecasters expect growth of
2.5% and 2.7% during the two-year period. RBC's forecast is for the
Canadian economy to post solid gains of 3.2% in 2011 and 3.1% in 2012
therein implicitly expecting more of a lift from the U.S. recovery.
The MPR indicates that the Bank expects business investment to play a
lead role in the recovery going forward with the contribution to
economic growth rising to 1.1 pp in 2011 (from 0.9) and 1.2 pp in 2012
(from 1.1). The update shows consumer spending making a slightly
larger contribution to GDP growth in 2011 although it will still be
much smaller than in 2010. The weight from reduced residential housing
investment was also cut back mildly relative to the October outlook.
The Bank acknowledged "the beginning of the expected rebalancing of
demand" referring to the increased role of business investment as a
support for growth as fiscal stimulus unwinds and household spending
is constrained by overextended balance sheets. Government spending
will make no contribution to GDP output in 2011 and will act as a drag
in 2012.
The trade sector was characterized as contributing "more" to growth
going forward (this follows an estimated 2.3 pp drag in 2010) although
net exports are estimated to add just 0.1 pp to the economy's output
in 2011 and a more substantive 0.7 pp in 2012. In the prior forecast,
the Bank predicted that net exports would provide a 0.3 pp boost to
activity in 2011 and 0.8 pp in 2012. While this is positive for the
economy, the Bank indicated that even with a stronger U.S. economy,
"competitiveness challenges" limited the upgrade to its projection for
export growth. Additionally, the persistently high value of the
Canadian dollar and poor productivity performance will also affect
export growth. The Bank assumed that the Canadian dollar will continue
to trade around parity during the forecast horizon when preparing its
forecasts. The other factor that will limit the support from net
exports will be stronger import growth as Canadian businesses increase
investment in an effort to alleviate competitiveness pressures and
increase productivity.
Even with the mild upward revisions to Canadian growth this year and
next, the central bank maintains that the output gap will close by the
end of 2012, and at which time, the core inflation rate will move to
2% target. The fact that the economy slowed more aggressively in the
second half of 2010 than the Bank expected means "a little more excess
supply in the near term" that will be offset by the marginally faster
pace of growth ahead. Canada's economy posted a 1.0% annualized gain
in the third quarter of 2010 disappointing the Bank's forecast of
1.6%; therefore, the Bank lowered its call for a fourth-quarter 2010
gain to 2.3% from 2.6%.
Despite providing a slightly more upbeat assessment for growth
prospects, at home and abroad in 2011 and 2012, today's report shows
that the Bank of Canada is maintaining a very cautious approach in the
removal of monetary policy support as the risks to the outlook are
"elevated". The list of risks deemed to be most prominent span from
events within the domestic economy ("competitive challenges",
weakening in the housing sector, high consumer debt loads, more
aggressive deceleration or acceleration in consumer spending) to
external events that could affect commodity prices or delay the
rebalancing within the global economy. The Bank's assessment is that
the balance of the risks to the inflation outlook remains roughly
balanced and that there will be a "gradual reduction in monetary
stimulus" in the projection period. Against this backdrop, should the
Canadian economy outperform the Bank's forecast in the near term, as
we expect it will, then a return to a policy of implementing gradual
rate hikes will not be far behind. We expect that the core inflation
rate will remain below the 2% target for much of 2011 and 2012.
Although this will not prevent the Bank from moving rates up, it will
keep the pace gradual with the overnight rate rising to only 2.00% by
the end of 2011.
Source: ActionForex.Com
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