Central banks signal low rates here to stay
Paul Vieira, Financial Post, with files from Reuters Published: Monday, August 24, 2009
OTTAWA -- Despite growing confidence that economic growth is in the offing, monetary policy around the world is likely to remain "ultra-accommodative," perhaps until 2011, as doubt remains as to whether or not the growth expected this quarter is sustainable, analysts say.
That is the view emerging following the weekend gathering of the world's leading central bankers in Jackson Hole, Wyo., highlighted by remarks from Ben Bernanke, U.S. Federal Reserve chairman, who warned of the uncertainties ahead, and Jean-Claude Trichet, president of the European Central Bank, who suggested he is in no rush to reverse emergency stimulus measures.
"The key message from Jackson Hole was ... that monetary policy is likely to remain ultra-accommodative for the foreseeable future - at least for the next several years," said Julian Jessop, chief international economist at Capital Economics of London.
"It seems more likely that there will be no increases in interest rates in any of the major economies over the next 12 to 18 months."
Strategists at RBC Capital Markets concurred, adding in a note released Monday: "We continue to believe the economic backdrop will warrant a significant additional period of low rates. Indeed, even at the Jackson Hole conference, there was not even a suggestion that we should be braced for anything other than that outcome."
This outlook applies to Canada as well. Banc of America Securities-Merrill Lynch, as part of global report on monetary policy, said it does not expect the Bank of Canada to begin raising rates until 2011 - well past its pledge to keep the key policy rate, at 0.25%, until June 2010.
Canada has a significant output gap - the difference between potential and real gross domestic product - and the rate at which money is deployed in the economy, or money velocity, has shrunk 15% since late last year even though the central bank has taken its target rate to its lowest possible level, the BofA-Merrill Lynch analysis indicates.
"To compensate, we think the Bank of Canada will probably need to keep rates lower ... to ensure that money creation remains in the double-digit [growth] territory needed to reinflate the economy and close the output gap," the report says.
This outlook is similar to what economists at Laurentian Bank Securities suggested last week. They said a lack of pricing power for firms, a sizeable amount of excess supply and virtually non-existent upward pressure from labour costs means the bulk of policy tightening would not materialize until 2011.
The Bank of Canada signalled in its last economic outlook that it expected economic growth to resume this quarter, marking, technically, the end of a deep but relatively short recession.
It expects growth this quarter of 1.3%, 3% in the final three months of 2009, and the latter again in 2010. Further boosting the recovery story was data from Japan, Germany and France that indicated economic growth in the second quarter.
But there are growing concerns about the sustainability of this emerging recovery.
In a note published last week, Olivier Blanchard, chief economist of the International Monetary Fund, warned of a difficult recovery that would take years to unfold as elements of the financial system remain dysfunctional.
Of particular concern in his outlook was the source of demand once governments phased out fiscal stimuli. The worry is that U.S. business investment and household spending would remain weak, and Asian economies would fail to pick up the slack.
Still, some leading central bankers warn about leaving interest rates too low too long.
Masaaki Shirakawa, governor at Bank of Japan, told his peers at Jackson Hole that policymakers must avoid economic bubbles fostered by expectations that interest rates will remain low.
"Shirakawa's point about the need to prevent future bubbles is weighing more on minds of central bankers, so maybe they do have to be a little more careful," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
Tuesday, August 25, 2009
Thursday, August 20, 2009
Alia McMullen, Financial Post
Canada's inflation rate hit a 56-year low Wednesday and will likely slip further in the coming months as the index continues to react to last year's record surge in oil prices. But while overall prices appeared somewhat deflationary in July, consumers would be forgiven for not noticing because core inflation, which excludes energy, remains higher than a year ago.
"Many Canadians are unlikely to feel their cost of living declined," said Sébastien Lavoie, an economist at Laurentian Bank Securities. He said prices of frequently purchased goods, such as food and parking, remained higher, while those of big-ticket durable goods, including cars and furniture, had fallen.
"The problem is that unless you buy these durable goods -- less likely amid the labour-market woes and increasing financial tensions -- you don't benefit from these lower prices," he said.
The all-items consumer price index declined by 0.9% in July compared with a year earlier, worse than the 0.3% drop recorded in June, Statistics Canada figures showed. It was the lowest reading since 1953 and was largely attributed to the fact gasoline prices were 23.4% lower than in July last year, when the cost of a barrel
of oil peaked at about US$147.
On the other hand, core inflation, which excludes energy, was rather resilient given the economy has been in recession. Core prices were 1.8% higher than in July 2008, down one basis point from last month but still only slightly below the Bank of Canada's inflation target of 2%.
Food prices eased from the previous month, but remained 5% higher than a year earlier, while the cost of recreation, education and reading was up 1.1% compared with 0.9% previously.
"Strip out energy volatility, and it becomes apparent that Canada doesn't have a problem with either inflation or deflation," said Krishen Rangasamy, an economist at CIBC World Markets.
Mr. Rangasamy said prices were expected to ease further in the coming months because of last year's higher oil prices, downwards pressure on some items from the recession and the recent rise in the Canadian dollar, which makes imported goods cheaper. This would allow the Bank of Canada to continue to stimulate the economy with record low interest rates and keep its conditional promise to hold the benchmark rate at 0.25% until mid-2010.
Despite an anticipated further softening in prices, economists do not expect deflation to get a stranglehold on Canada. Stewart Hall, an economist at HSBC Securities said signs of economic recovery and a decline in oil prices in the second half of last year are expected to drive headline inflation back into positive territory by the end of this year.
He said a rise in Canada's composite leading index confirmed projections the recession likely ended in the current quarter were likely correct. The leading index for July rose for the first time in almost a year Wednesday to be up by 0.4%, Statistics Canada figures showed. The results signalled an improvement in the sectors of the economy that lead economic growth, such as the stock markets and housing.
"The leading economic index is coinciding with broad expectations for the Canadian economy to have turned the corner in the second half of 2009 and begun to head down the long road to recovery," Mr. Hall said.
Canada's inflation rate hit a 56-year low Wednesday and will likely slip further in the coming months as the index continues to react to last year's record surge in oil prices. But while overall prices appeared somewhat deflationary in July, consumers would be forgiven for not noticing because core inflation, which excludes energy, remains higher than a year ago.
"Many Canadians are unlikely to feel their cost of living declined," said Sébastien Lavoie, an economist at Laurentian Bank Securities. He said prices of frequently purchased goods, such as food and parking, remained higher, while those of big-ticket durable goods, including cars and furniture, had fallen.
"The problem is that unless you buy these durable goods -- less likely amid the labour-market woes and increasing financial tensions -- you don't benefit from these lower prices," he said.
The all-items consumer price index declined by 0.9% in July compared with a year earlier, worse than the 0.3% drop recorded in June, Statistics Canada figures showed. It was the lowest reading since 1953 and was largely attributed to the fact gasoline prices were 23.4% lower than in July last year, when the cost of a barrel
of oil peaked at about US$147.
On the other hand, core inflation, which excludes energy, was rather resilient given the economy has been in recession. Core prices were 1.8% higher than in July 2008, down one basis point from last month but still only slightly below the Bank of Canada's inflation target of 2%.
Food prices eased from the previous month, but remained 5% higher than a year earlier, while the cost of recreation, education and reading was up 1.1% compared with 0.9% previously.
"Strip out energy volatility, and it becomes apparent that Canada doesn't have a problem with either inflation or deflation," said Krishen Rangasamy, an economist at CIBC World Markets.
Mr. Rangasamy said prices were expected to ease further in the coming months because of last year's higher oil prices, downwards pressure on some items from the recession and the recent rise in the Canadian dollar, which makes imported goods cheaper. This would allow the Bank of Canada to continue to stimulate the economy with record low interest rates and keep its conditional promise to hold the benchmark rate at 0.25% until mid-2010.
Despite an anticipated further softening in prices, economists do not expect deflation to get a stranglehold on Canada. Stewart Hall, an economist at HSBC Securities said signs of economic recovery and a decline in oil prices in the second half of last year are expected to drive headline inflation back into positive territory by the end of this year.
He said a rise in Canada's composite leading index confirmed projections the recession likely ended in the current quarter were likely correct. The leading index for July rose for the first time in almost a year Wednesday to be up by 0.4%, Statistics Canada figures showed. The results signalled an improvement in the sectors of the economy that lead economic growth, such as the stock markets and housing.
"The leading economic index is coinciding with broad expectations for the Canadian economy to have turned the corner in the second half of 2009 and begun to head down the long road to recovery," Mr. Hall said.
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