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Top 3 reasons the Bank of Canada has turned dovish

Posted on Sep 6, 2013 in Mortgage Market Updates and News

By Pamela Heaven
The Bank of Canada held its benchmark interest rate at 1% Wednesday, extending its super-low rate run to three years. The hold was no surprise; it was the darker tone of the bank’s statement that caught the attention of economists.
Scotiabank economist Derek Holt’s notes a “slightly elevated level of concern” in the statement. Here are his top 3 reasons why.
Read the Bank of Canada’s official statement here
1) Global recovery: “Its dynamic has moderated,” says the Bank, while recent data from the U.S. “points to slightly less momentum overall than anticipated.
All in all, the global recovery is proving disappointing to Canada, which “matters enormously to a country that exports more than 70% of its exports to the US,” wrote Holt, in a note to clients.
2) Emerging markets: “In a number of emerging market economies, financial volatility has increased, adding uncertainty to growth prospects, although China continues to grow at a solid pace.” Emerging markets are important to Canada because of their role in setting global commodity prices, and the bank’s statement reveals a heightened concern.
3) Slumping trade: So much for the export-led recovery. “Uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment,” says the Bank’s statement, acknowledging that disappointing data such as Wednesday’s trade balance (Canada’s trade deficit doubled as exports fall) is forcing it to rethink the timing of the export-led recovery it had envisioned.
So where does this leave interest rates? The Bank’s gloomier outlook had some observers pushing their predictions for the next rate change into 2015.
“The bottom line is that we are still looking at a very long period of inactivity by the Bank, and may well be talking about four years of unchanged rates a year from now. Officially, we are looking for the Bank to start raising rates in 2014 Q3, but that is contingent on our view that the U.S. economy will pick up meaningfully in coming quarters,” wrote BMO chief economist Douglas Porter.
“Although the Bank of Canada retained its tightening bias word for word, it now admits that the continuing weakness in exports and investment mean hopes of a smooth ‘rotation in demand’ look less promising than before. This new dovish admission hints that monetary policy will have to remain highly accommodative for longer than the consensus view,” wrote economists at Capital Economics.


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