Bank of Canada says world economy still full of risks, adding Ukraine to worries

OTTAWA – Bank of Canada is keeping its low-interest rate policy in place for a while longer, signalling Wednesday that it remains to be convinced the global economy is out of danger — adding Ukraine to its list of worries.

“Volatility in global financial markets has increased somewhat, reflecting buoyant market conditions in most advanced economies and increased risk differentiation among emerging markets,” it said. “More recently, tensions in Ukraine have added to geopolitical uncertainty.”

The central bank kept its overnight policy rate at one per cent in its scheduled announcement date, a setting that has been in place since September 2010.

The low rate has brought Canadian consumers and businesses some of the most attractive borrowing conditions in memory and helped provide economic stimulus following the 2008-9 recession.

The bank’s decision to stay the course was widely expected by markets, which believe the central bank won’t be anxious to raise interest rates, or even signal its intention to do so, for some time.

Economists say part of bank governor Stephen Poloz’s calculation is that maintaining a dovish stance on rates is at least partly responsible for the Canadian dollar’s well below parity with the U.S. dollar in the past few months, which helps him advance his agenda of stimulating export growth and moderately pumping up inflation.

Still, the Canadian dollar rose on the announcement and was up almost 0.32 cents to 90.41 cents U.S. in morning trading at the Toronto Stock Exchange.

Bank of Montreal chief economist Doug Porter said Poloz’s assessment that the current monetary position was “appropriate” likely disappointed market players still holding out hope for a rate cut this year.

“I think it shows there was still a reasonable body of opinion that believes the bank was inclined to possibly ease … and I think between the data and the bank’s statement today, the largely quashed that view,” he said.

CIBC said the next move should be an increase, but that likely won’t come until the middle of next year.

The mention of the Ukraine crisis caught some by surprise, although Porter said it had the ring of being inserted in the last minute.

Still, a new report issued by the C.D. Howe Institute on Wednesday judged Canada remains vulnerable to eurozone turmoil, as well as citing potential Ukraine crisis spillover effects.

“I find the effect of setbacks in the eurozone on Canada’s economy could be significant,” said author Pierre Siklos, a professor at Wilfrid Laurier University’s School of Business and Economics, in a release. The impact of a “perfect storm” that brings in the world and U.S. economies could result in an almost eight per cent real gross domestic product falloff after two and a half years, he said.

In the statement, the bank’s governing council was more sanguine about future prospects, dismissing the disappointing fourth quarter in the U.S. as largely owing to the unusually cold winter. Overall, it said conditions had improved somewhat in Canada.

“On the whole, the fundamental drivers of growth and inflation in Canada continue to strength gradually, as anticipated,” it said.

The Canadian fourth-quarter growth rate came in at 2.9 per cent, almost half-a-point better than the bank’s own guess, and at 1.5 per cent, January inflation edged closer to the bank’s target of two per cent.

Poloz had signalled concern when overall inflation fell below one per cent and core inflation remained close to the low end of the Bank of Canada’s range of between 1.0 and 3.0 per cent.

On the housing front, the bank likes what it sees. It said recent data supports its view of a soft-landing scenario, somewhat contradicting a report from a U.S. financial institution this week that predicted prices could fall by 20 per cent. And it believes household debt levels are also stabilizing.

But the bank is not entirely convinced the good news represents a permanent turning point in the outlook. It called low inflation an important downside risk, judging it would remain well below the target for some time. As well, while fourth quarter growth was higher than expected, the first quarter of 2014 will likely be weaker, it said.

Overall, the bank hasn’t changed its mind that this year will see a modest 2.5 per cent advance.

Meanwhile, while exports have been stronger, they remain an underperformer in the economy and business investment has yet to pick up, it said.

On top of that, the world remains beset with risks and uncertainty, it cautioned.

Putting it all together, the bank said “the balance of risks remains within the zone for which the current stance of monetary policy is appropriate.”

The next interest rate announcement is scheduled for April 16.