Bank of Canada to keep interest rates low longer

Low rates needed for stimulus.

OTTAWA – The Bank of Canada is giving hints that it is no longer as concerned about households being lured into taking on unsustainable levels of debt and says it’s appropriate to keep the cost of borrowing near historic lows.

As expected, the central bank kept its overnight policy rate at one per cent on Wednesday, the level that has been in place for about two-and-a-half years.

But for the third time in a row, the bank’s governing council softened its key forward-looking guidance on future rate hikes, suggesting it now expects the current rate to remain in place longer than it had previously expected.

Its statement also mentioned a “constructive evolution” in household finances.

“With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time,” the bank said.

That is a subtle change for January’s guidance which talked about the need for “gradual withdrawal of monetary stimulus” being “required over time.” The latest guidance does not drop the phrase altogether, but places it secondary to its main point that this is no time to remove stimulus.

Some economists had been expecting the bank to drop the tightening bias altogether, but the statement did not go as far. Nor was the bank ready to drop its growth projections for this year and next, as some had suggested might occur.

In what economists now call a too-rosy view of Canada’s prospects, the bank said in January it expects real gross domestic to advance by two per cent this year and 2.7 per cent in 2014.

Most analysts now believe growth will come in well shy of two per cent this year, and Finance Minister Jim Flaherty will likely be adopting the softer projection when he meets with a sampling of economists on Friday in preparation for this spring’s budget.

In a one-page statement on Wednesday, the bank’s governing council barely acknowledged that it had missed the weakness in the second half of 2012, when growth averaged a disappointing 0.7 per cent.

Instead, it emphasized that there had been “solid growth across most domestic components of GDP” in the latter months of last year, and attributed the low overall output to sharp reduction in inventory investment.

“The bank expects growth in Canada to pick up through 2013,” it said, “supported by modest growth in household spending, combined with a recovery in exports and solid business investment.”

What’s more, it says that real estate investment — a major source of household debt — is expected to decline further from historically high levels.

“The bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.”

That is the most sanguine view of household finances the bank has had in several years.