FINANCIAL ICEBERG

Always consider hidden risks

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MARKET INSIGHT

Bank of Canada Battle of the Bulge : The Unexpected Scenario

( From Bank of Canada,​ Business Week, Trading Economics, Globe and Mail, Wiki )

Bank of Canada Hikes Wishes Delayed Again

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Bank of Canada Governor Mark Carney said the need to raise interest rates is less urgent because the economy will take longer to reach full output, keeping inflation below target until the second half of next year. Officials opted yesterday to leave the benchmark borrowing rate unchanged at 1 per cent, where it’s been for more than two years, but dispatched with language that indicated worry that rising house prices and consumer debt posed a threat to the financial system.



Policy makers said Canada’s gross domestic product would expand 2 per cent in 2013, compared with an October estimate of 2.3 per cent. GDP likely grew only 1.8 per cent last year, compared with the central bank’s autumn expectation of 2 per cent.

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The change in outlook reflects Canada’s struggle to find a growth engine to replace a fast cooling housing market. The downgrade isn’t big enough to require lower interest rates, but it is reason enough to keep borrowing costs lower for longer. The Bank of Canada said at the end of its latest policy deliberations yesterdday that the economy now likely won’t grow fast enough to stoke inflation until the second half of 2014, later than previously thought.



​​Canada’s economic expansion slowed to a 0.2 percent annualized pace in the fourth quarter, which was “more pronounced than the Bank had anticipated” in October, policy makers said. They cut their estimate of fourth-quarter growth to 1 percent from 2.5 percent, and reduced their forecast for the January-to-March period to 2.3 percent from 2.6 percent.



The exports that make up about a third of gross domestic product are being restrained by the Canadian dollar’s “persistent strength,” the bank said.



​​The International Monetary Fund also cut its forecast for Canada on Wednesday, dropping its outlook for the country to 1.8 per cent in 2013, compared to its October estimate of 2 per cent. Canada no longer can lay claim to the mantle of fastest growing Group of Seven economy, as the IMF projects the U.S. to outpace Canada through 2014. The IMF predicted the global economy would 3.5 per cent this year, a downgrade of 0.1 percentage points from October.



​​ “The more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated,” Carney, 47, said at a press conference in Ottawa yesterday.

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​ “It is reasonable to assume that the Bank is stepping away from leaning against financial imbalances,” in the new wording on consumer debt, said Jimmy Jean, a strategist in the fixed- income group at Desjardins Capital Markets in Montreal. “The Bank has chosen to quit being the world outlier.”





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Bank of Canada Statement in January 18 2011, January 17 2012 and March 6 2013

​( 2011 in grey , 2012 in blue and 2013 in orange ) And highlights in green.



We took the official statements of the Bank of Canada for the past 3 years and split the text within the subjects below :

Global Economy

Canadian Growth Rate and Ouput Gap

Inflation

Rates Expectations​​​ ​ ​ ​

Global Economy



2011

​ The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated, although risks remain elevated. Private domestic demand in the United States has picked up and will be reinforced by recently announced monetary and fiscal stimulus. European growth has also been slightly stronger than anticipated. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook . In response to overheating, some emerging markets have begun to implement more restrictive policy measures. Their effectiveness will influence the path of commodity prices, which have increased significantly since the October Monetary Policy Report (MPR), largely reflecting stronger global growth.



2012​

​ The outlook for the global economy has deteriorated and uncertainty has increased since the Bank released its October Monetary Policy Report (MPR). The sovereign debt crisis in Europe has intensified , conditions in international financial markets have tightened and risk aversion has risen. The recession in Europe is now expected to be deeper and longer than the Bank had anticipated in October. The Bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks. In the United States, while the rebound in real GDP during the second half of 2011 was stronger than anticipated, the Bank expects the U.S. recovery will proceed at a more modest pace going forward, owing to ongoing household deleveraging, fiscal consolidation and the spillovers from Europe. Chinese growth is decelerating as expected towards a more sustainable pace. Commodity prices – with the exception of oil – are expected to be below the levels anticipated in the October MPR through 2013.

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Canadian Growth Rate and Output Gap



2011

​The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. However, 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.



Overall, the Bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 – a slightly firmer profile than had been anticipated in the October MPR. With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.



2012

​The Bank’s overall outlook for the Canadian economy is little changed from the October MPR. While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment . Prolonged uncertainty about the global economic and financial environment is likely to dampen the rate of growth of business investment, albeit to a still-solid pace. Net exports are expected to contribute little to growth, reflecting moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar. In contrast, very favourable financing conditions are expected to buttress consumer spending and housing activity. Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.



The Bank estimates that the economy grew by 2.4 per cent in 2011 and projects that it will grow by 2.0 per cent in 2012 and 2.8 per cent in 2013. While the economy appears to be operating with less slack than previously assumed, given the more modest growth profile, the economy is only anticipated to return to full capacity by the third quarter of 2013, one quarter earlier than was expected in October.

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Inflation



2011

​ Underlying pressures affecting prices remain subdued , reflecting the considerable slack in the Canadian economy. Core inflation is projected to edge gradually up to 2 per cent by the end of 2012 , as excess supply in the economy is slowly absorbed. Inflation expectations remain well-anchored. Total CPI inflation is being boosted temporarily by the effects of provincial indirect taxes, but is expected to converge to the 2 per cent target by the end of 2012.



2012

​The dynamics for inflation are similar to those anticipated in the October MPR, although the profile for inflation is marginally firmer. Both total and core inflation are expected to moderate in 2012 and subsequently rise, reaching 2 per cent by the third quarter of 2013 as excess supply is slowly absorbed, labour compensation grows modestly and inflation expectations remain well-anchored.



Several significant upside and downside risks are present in the inflation outlook for Canada. Overall, the Bank judges that these risks are roughly balanced over the projection horizon.





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Rates Expectations



2011

​Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place , consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.



2012

​Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada . The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.





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Battle of the Bulge - Summary

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The Battle of the Bulge ( also known as Ardennes Offensive 16 December 1944 – 25 January 1945 ) was a major German offensive launched through the densely forested Ardennes mountain region of Wallonia in Belgium, and France and Luxembourg on the Western Front towards the end of World War II.



The offensive was planned with the utmost secrecy, minimizing radio traffic and moving troops and equipment under cover of darkness. Although Ultra suggested a possible attack and the Third U.S. Army's intelligence staff predicted a major German offensive, the Allies were still caught by surprise. This was achieved by a combination of Allied overconfidence, preoccupation with their own offensive plans, and poor aerial reconnaissance.



Near-complete surprise against a weakly defended section of the Allied line was achieved during heavy overcast weather, which grounded the Allies' overwhelmingly superior air forces. ...



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Bank of Canada s Battle against the ghost inflation...



We will explain that for the past three years, the Bank of Canada has been fighting against the potential of an inflation risk that never showed up... And like the Battle of the Bulge​​, they where caught near-complete surprise against the worst case scenario for them :

​a weakening economy, commodity prices falling, household debt at historic high with the housing market in a bubble territory...

2013

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.



2013

​The global economic outlook is broadly consistent with the Bank’s projection in its January Monetary Policy Report (MPR). Global financial conditions remain stimulative, despite recent volatility. In the United States, the economic expansion is continuing at a gradual pace and private sector demand is gaining momentum. Fiscal drag in the United States over the next two years remains consistent with the Bank’s January projection, although it is likely to be more front-loaded as a result of sequestration cuts. The recession in Europe continues. Growth in China has improved , while economic activity in some other major emerging economies is expected to benefit from policy stimulus. Commodity prices have remained at historically elevated levels, although persistent transportation bottlenecks are leading to continued discounts for Canadian heavy crude oil.

2013

Canada’s economy grew by 0.6 per cent at annual rates in the fourth quarter of 2012, with solid growth across most domestic components of GDP offset by a sharp reduction in the pace of inventory investment. The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment. With a more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further , with the debt-to-income ratio stabilizing near current levels. Despite the expected recovery in exports, they are likely to remain below their pre-recession peak until the second half of 2014 owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.