Financial System Yet To Be Steady: Bank Of Canada

Here is bad news for all who are of the view that the recent worldwide economic recession is over and the economy is rolling as usual. Contrary to this, the Bank of Canada has recently warned that it will take another year for the Canadian fiscal system to be able to stand on its own feet and sans any assistance from the federal government. In fact, the central bank of Canada still appears to be somewhat cynical regarding the recovery of the country's economy.

The cynical view of the Bank of Canada was evident when the central bank specifically hinted that it was not in haste to revoke the historically low rates of interest. Substantiating its view, the central bank said that these measures initiated to provide incentive to the banking industry were still required to encourage obtaining loans as well as expansion of businesses. In fact, the central bank has very slightly modified the earlier predictions regarding the growth of the economy for the current fiscal and raised it somewhat for the next year.

Actually, the message that the Bank of Canada governor Mark Carney has tried to communicate is that the Canadian as well as the economies in other countries may be perking up, but they are still basically being supported by colossal spending by the respective governments as well as the lowest interest rates in the history as well as other supporting initiatives. In fact, Carney and his policy-making board has said that though the viewpoint for worldwide economic growth in the course of 2010 and 2011 appears to be slightly robust compared to what the bank had anticipated in October last year, the revival actually depends on the extraordinary financial and economic incentives along with the unusual initiatives undertaken to back up the fiscal systems.

Referring to the Canadian fiscal system, the central bank's policy making council said that presently the country's economy was functioning at around 3.5 per cent below its capacity and it is unlikely that the private sector will be able to individually push the demand growth till 2011. Keeping this aspect in view, the bank has maintained its innovative instant interest rate at 0.25 per cent - possibly the lower most since the time passed, and has once again assured to maintain it at the same level for the next six months. With a view to underline the pledge, the central bank of Canada has also prolonged its emergency lending mechanism till April this year enabling the chartered banks to access funds at the historically small rate of interest.

In fact, the announcement made by the Bank of Canada regarding not initiating any hike in the interest rate had resulted in the Canadian dollar to drop by 97 cents from its exchange rate of 97.42 cents US during majority of the trading period on Monday last. On the following day, the Canadian dollar closed at 0.40 of a cent at 97.02 cents US. Commenting on the developments, independent economist Dale Orr said that the figures were evidence of the fact that the central bank has been able to accomplish its mission.

According to Dale Orr, one of the main tasks before the Bank of Canada governor Mark Carney during the ensuing quite a few months is to dampen markets from assuming that he would be raising the interest rate before the Unites States Federal Reserve does so. If this is done, it will eventually reinforce the Canadian dollar and, at the same time, abate the revival by putting off exports. On the whole, the central bank's outlook on the country's fiscal system remains virtually unchanged since October - the last time when the Bank of Canada had released an outlook, and now it seems that the economy is adhering to the predictions made by a number of forecasters.

The Conference Board of Canada released its most recent prediction on January 19, 2010 gauging the country's economic growth at 2.8 per cent during the current year. However, the grow projections .issued by the Bank of Canada is minutely higher at 2.9 per cent - an estimation that is still higher compared to the unanimity assessment of 2.6 per cent. The Bank of Canada has expressed hope that the fiscal system will increase by 3.5 per cent during 2011 - an estimation that is again higher in comparison to many other predictions in this regard.

In fact, last Tuesday, there was an indication that the country's economy has begun to recover approximately after a year of tightening and job losses and retrenchments. According to Statistics Canada, its principal index for December 2009 went up by 1.5 per cent - the largest advance in a single month ever since 1958 and none of its 10 major elements have registered any losses.

The recent remarks of the central bank have given rise to a mixed view among the experts. While a section of the commentators describe the remarks of the Bank of Canada as 'dovish' or a move to advocate peace and stability, another section said that they have observed elements of buoyancy and confidence in the central bank's statement. According to economist Derek Holt of Scotiabank, he has observed that in its latest statement, the central bank has done away with a comment present in its previous text that said 'significant fragilities remain'. Instead, the bank's latest statement predicts that compared to its earlier assumptions made three months back, the global expansion was likely to be slightly stronger during 2010 as well as 2011.

Meanwhile, currently economists have begun to point out that during the last three months of 2009, the growth of Canada's gross domestic product (GDP) was anything between three to four per cent and is expected to grow in a similar rate all through this winter. According to economist Derek Holt, even if the financial growth calms down, there is hardly any rationalization in presenting 'free money' since it will become increasing tough henceforth.

On the other hand, Bank of Canada governor Mark Carney has repeated his apprehension regarding the poor demand for Canadian exports, especially in the neighboring United States, and the exorbitant price the manufacturers have to shell out in order to maintain a strong loonie. The statement issued by the central bank has emphasized that the unrelenting strength of the Canadian dollar coupled with the absolutely low intensity of the United States' demand keeps on operating as noteworthy encumbrances for the economic activity in Canada.

In fact, the statement issued by the central bank received some support on the point by a report issued by a TD Bank on the same day. The evaluation done by the TD Bank has urged the manufacturing sector to increase their production above the performance of most of the other sectors for some more years in the near future. Despite this, it is unfortunate that the manufacturing output is unlikely to reach the level where it was a decade ago in the next few years primarily owing to its drastic fall during the global recession. Despite signs of economic revival, another economist Dina Cover said that drop-off in the production and sales in the automobile sector would be particularly perceptible during the next few years.

It is important to note that in another part of the statement issued by the Bank of Canada recently, the central bank has pointed out that inflation has been getting higher and faster compared to what they had actually foreseen. However, at the same time, the bank has assured that presently it was not very alarmed at this issue. According to the bank, it does not expect the inflation to drop to the two per cent objective till the third quarter of 2011. Many view this as another hint by the central bank that it is in no haste to raise the historically low interest rate, currently at 0.25 per cent.

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