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The Bank of Canada this week backed away from its previous stance that it would have to tighten monetary policy soon, but left words of caution for investors betting on a cut in interest rates.
While the BoC took a more bullish stance in its April rate announcement, the euro zone’s sovereign debt crisis and a slowing global economy has tempered such an outlook.
“Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions,” the bank said in its statement on Tuesday, announcing the rate decision.
The BoC’s softened tone and heightened concern about the problems in Europe indicate that it is in no rush to raise interest rates amid growing uncertainty.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2-percent inflation target over the medium-term,” it said. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”
Capital Economics -- long-time bears on the outlook for the Canadian economy -- says the softened language by the BoC adds credence to their view that economic growth will be hard to come by.
“The Bank is now more deeply concerned about the faltering global economic recovery and the downside risks to growth in Canada. This supports our view that interest rates are unlikely to rise anytime soon,” David Madani said in a note to clients. “As such, the broader message remains that short and longer-term interest rates are likely to remain low for years.”
But, parsing the language of the central bank -- which has often led to vastly different interpretations -- has never been easy.
Economists at Desjardins disagree with Capital Economics, saying the bank provided enough evidence to investors that while interest rates may remain low in the short-term, the next move will only be in one direction: Up.
“The BoC still believes that the next change in its monetary policy will be an increase in its key interest rates. This should rein in the speculation by some investors, who until just recently were counting on a lowering of the target for the overnight rate in the months ahead,” Benoit Durocher said in a note to clients. “That said, we detect some hesitation on the part of the monetary authorities.”
The BoC’s new stance comes as Europe’s sovereign debt deepens and economic data in the world’s two largest economies – the U.S. and China – point to a slowdown.