OTTAWA -- The Bank of Canada left its key policy rate unchanged Tuesday at one per cent, while slightly boosting its outlook for economic growth this year and next due to a pickup in U.S. demand and an anticipated strong rebound in business investment.
The central bank now expects the economy to expand 2.4 per cent this year and 2.8 per cent in 2012, which is up modestly from its October forecast of 2.3 per cent and 2.6 per cent, respectively.
Net exports are expected to contribute more to growth than anticipated, the central bank added, although warning the "persistent" strength of the Canadian dollar and poor productivity will hold back momentum in the trade sector. And it flagged the widening of the current account deficit to a recent 20-year high, which analysts have warned is a sign the country may be living beyond its means.
All told, the central bank stuck to its previous view that the economy won't reach full potential until the end of 2012, a reflection that "significant" excess capacity remains in place. Inflation, which the central bank said has been "temporarily" boosted by the introduction of new sales taxes in British Columbia and Ontario, is expected to "converge" to the preferred two per cent target by the end of next year.
The central bank, as expected, kept rates as is, and its statement tried to strike a balance between highlighting recent improvements in the economy and factors that are expected to impede a faster pace of expansion. Further colour is expected when the Bank of Canada releases its updated economic outlook Wednesday.
It acknowledged the global recovery is proceeding "at a somewhat faster pace" than it previously anticipated. Risks remain elevated, the central bank said, while in its recent December decision it indicated risks had increased.
The driver for this improvement is the United States. The central bank said U.S. private-sector demand "has picked up and will be reinforced" by the Federal Reserve's $600-billion US asset-purchase plan and the political deal to extend Bush-era tax cuts by two years.
Furthermore, European growth has been "slightly stronger" than anticipated. However, sovereign debt woes remain "a significant source of uncertainty to the global outlook."
In Canada, the economy is beginning to see a rebalancing of demand, the bank statement said. Government stimulus is winding down, and consumer spending and real estate activity is set to moderate as households deal with record debt levels. (The statement made no mention of the federal government's decision Monday to toughen mortgage-lending rules.) Picking up the slack, instead, will be capital spending by business sector.
"Business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives," the central bank said.
In the Bank of Canada's business outlook survey released last week, 44 per cent firms suggested they expected greater investment in machinery and equipment over the next year, with 41 per cent indicating capital-spending levels would remain the same - levels that economists said remained "quite strong."
A healthy pickup in U.S. growth and continued demand for commodities would boost net exports, the central bank said. Net exports proved to be a major drag on growth in the third quarter of 2010 but is now expected to add to gross domestic product expansion in the October-to-December period.
"However," it added, "the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high."
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