Bank of Canada lifts some forecasts, warns on debt

Wed Apr 18, 2012 2:07pm EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada on Wednesday raised its economic growth forecasts for the first three quarters of 2012 and repeated a warning about high household debt, pointing to the popularity of home equity lines of credit (HELOCs) as part of the problem.

Thanks to low borrowing costs, household spending and business investment will power Canada's moderate economic growth through the end of 2014, while exports remain weak and high oil prices fail to bring the usual benefits, the central bank said in its quarterly Monetary Policy Report.

"Private domestic demand, supported by accommodative financial conditions, is expected to account for almost all of Canada's economic growth over the projection horizon," the bank said.

Canadians will start to save a little more and growth in residential investment will slow over the next 2-1/2 years, the bank predicted. But it sees the ratio of household debt to income rising further from near-record highs as spending remains strong relative to gross domestic product.

The report comes a day after the bank held its key interest rate at 1 percent but surprised markets by saying some modest withdrawal of monetary stimulus "may become appropriate" due to firmer growth and inflation and a less daunting global backdrop.

Market players focused on the detailed quarterly forecasts, which suggest the bank sees excess slack in the economy disappearing in the first quarter of 2013, which in turn helps predict the start of monetary tightening.

Analysts now forecast, on average, a move by the bank in the first quarter of 2013 whereas last month they thought it would be in the third quarter, putting Canada well ahead of the U.S. Federal Reserve, the European Central Bank and others.

"We have pushed forward the timing of the first rate hike to the final quarter of 2012 in our forecast," said Dawn Desjardins, assistant chief economist at RBC Economics.   Continued...

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie (CANADA)