The Bank acknowledged that recent indicators point to the start of a global recovery, and that economic and financial developments have turned more favourable than it had previously expected. While recognizing that the Canadian economy is rebounding, it expects the recovery to be weak by historical standards.
The Bank downgraded its forecast for Canadian economic growth this year, while keeping its forecast unchanged for 2010. It also lowered its forecast for economic growth in 2011.
In its September announcement to hold interest rates steady, the Bank forecast that inflation would return to its two per cent target in the second quarter of 2011. The Bank has now moved that date out to the third quarter of 2011.
The Bank’s commitment to keep interest rates on hold until the second half of next year is conditional on the outlook for inflation. Since inflation is not expected to pick up sooner than it previously expected, the Bank repeated its commitment to keep interest rates on hold. “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”
The Bank pointed to the rapid rise in the Canadian dollar in recent weeks as a risk to the Canadian economic recovery, saying “Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures.” The Bank now expects that the domestic economy will be a greater source for economic growth, at the expense of weaker net exports.
The Bank expects the output gap to close in the third quarter of 2011, one quarter later than it had projected in July when it said production would reach capacity in mid-2011.
“The Bank threw cold water on recent speculation that it may raise interest sooner rather than later,” said CREA Chief Economist Gregory Klump. “By highlighting the recent rapid rise in the Canadian dollar while intentionally failing to mention the rebound in the Canadian housing market as sources for concern, the Bank aimed to end recent speculation that it will hike rates before its repeated pledge of not doing so until at least July 2010.”
As of October 20th, the advertised five-year conventional mortgage rate stood at 5.84 per cent. This is down 1.36 per cent from one year earlier, but stands 0.35 per cent above where it stood when the Bank made its previous interest rate announcement on September 10th.
Improving credit market conditions have enabled lenders to reintroduce discounts off posted mortgage interest rates. Discounts of up to a percentage point can be negotiated, depending on lender-client relationship.