* BoC raises quarterly GDP forecasts through 3rd quarter
* Warns on HELOCs funding consumption growth
* Exports to reach pre-recession peak at end-2013
* Too simplistic to say C$ a commodity currency
By Louise Egan
OTTAWA, April 18 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
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.
"We maintain our stance that the Bank will remove policy
stimulus slowly in order to avoid applying too much downward
pressure on domestic demand against an environment of sub-par
global growth and given the limited support from net exports
already embedded in the Bank's view," she wrote in a note.
The bank, which has repeatedly expressed concern about
Canadians taking on too much debt at current low rates, said
borrowing through HELOCs had mushroomed to C$64 billion ($64.6
billion) in 2010 from C$8 billion in 2001.
This type of debt has funded about 3 percent of aggregate
consumer spending in Canada in recent years, up from less than 1
percent in 2001, and is not sustainable. Some banks are not
careful enough when lending via HELOCs, he said.
"There are good aspects of it, but it contributes to a
broader issue where some Canadian households are becoming
overstretched and Canadian households as a whole are being
overstretched which creates risk for the economy," he said.
The bank raised its economic growth forecasts for each of
the first and second quarters to 2.5 percent, annualized, from
1.8 percent in January. It also revised upward its third-quarter
growth projections but lowered the forecast for the fourth
quarter and throughout 2013.
A stronger U.S. outlook and European action to resolve its
debt crisis explains the stronger growth forecasts. There is a
reduced chance of an "extreme negative event" in Europe, the
bank said, but it still sees a big risk there.
Also helping growth is robust business investment.
High oil prices typically boost incomes in Canada - a net
oil exporter - but are unfavorable now because prices for the
crude Canada exports have fallen while those for imports are up.
Oil prices are less of an influence on the Canadian dollar
than many people assume, Carney warned.
"And to trade or to invest in the currency along those
lines, ultimately over the medium term, it's going to be a
recipe for losing money."
The strong currency is one actor keeping exports weak - they
won't reach their pre-recession peak until the end of 2013 - but
the best way to boost exports is to penetrate new markets,
"We're locked into slow-growing markets. More than 85
percent of our exports go to slow-growing economies ...," he