The Bank of Canada has held its key interest rate at 1% and cut its outlook for economic growth from now until 2015.
In its monetary policy report released today by Governor Stephen Poloz, the central bank has cut its outlook for economic growth to 1.6% this year, 2.3% in 2014 and 2.6% in 2015, a sizable downgrade from its July outlook. The bank says it sees the economy returning to full capacity by the end of 2015.
The statement also removes the bank’s warning that a rate hike is inevitable, a "major turn in guidance," according to Andrew Pyle, senior wealth adviser and portfolio manager at Scotia McLeod.
The central bank had adopted a stated bias towards hiking rates in April 2012 to caution consumers about over-borrowing.
The change in guidance has led to the assumption among market watchers that it is just as likely the bank will cut the key one per cent overnight rate in the future as hike it.
At a news conference following the release of the bank's monetary policy report and rate announcement, Poloz made no effort to dissuade markets from that assumption.
"The statement is making it clear we have balanced the risks," Poloz said. "If we were to receive more data flow that was more negative for that inflation outlook, then we would need to rethink that balance."
The Bank of Canada says softer-than-expected U.S. growth pushed its economic forecast lower, but that it expects "a better balance between domestic and foreign demand will be achieved over time and that economic growth will become more self-sustaining."
In its July report, the bank had predicted the Canadian economy would grow 1.8% this year, followed by 2.7% in 2014 and 2015, returning to full capacity in mid-2015. But Poloz is now more pessimistic.
"In Canada uncertain global and domestic economic conditions are delaying the pick up in exports and business investment, this leaves the level of economic activity lower-than-expected," he said.
The announcement sent the Canadian dollar plummeting, down 0.92 cents against the U.S. dollar to 96.28 cents U.S. in late afternoon trading Wednesday.
That won't be the end, according to one expert, who says he sees the Canadian dollar falling to 92 cents U.S. within a month, and that adds Poloz is attempting to push the dollar down to boost exports.
The lower economic outlook and stubbornly low inflation mean the Bank of Canada is likely to hold interest rates for at least another two years, the expert says. For people with variable rate mortgages, that could mean no change until 2016, but he warns that higher bond yields may push up rates for people looking at a mortgage with a five-year term.
