Carney May Say His June Options Are `Wide Open' in Canada Senate Testimony

Bank of Canada Governor Mark Carney may damp investor expectations he will raise his policy interest rate in June during parliamentary testimony today, through a change in language from last week’s interest rate announcement.

Carney shifted his wording about the prospects for rate increases in testimony to the House of Commons Finance Committee April 27. He said the bank’s decision to drop a conditional commitment to keep rates unchanged represented a “tightening” of policy, adding that “going forward, nothing is pre- ordained.” Carney will likely make a similar statement when he appears at the Senate banking committee today at 10:30 a.m. New York time.

“Those lines were quite important,” said Douglas Porter, an economist at BMO Capital Markets in Toronto. “Clearly, the bank wants to keep its options wide open for June.”

Investors increased bets on a June 1 rate increase after the bank’s April 20 policy announcement dropped the pledge to keep the key interest rate at 0.25 percent through June, and said the timing of further action would depend on economic growth and inflation. Since then, Canada has reported an unexpected slowing of inflation and Greece’s debt crisis has led to declines in the Canadian dollar and stock prices.

“Carney sounded just slightly more cautious about the outlook,” said Mark Chandler, a fixed income strategist at RBC Capital Markets in Toronto. “He’s underscoring that they will evaluate things as they go along.”

Swap Rates Rise

The yield on the three-month overnight index swap, a measure of what investors predict the bank’s rate will average over that period, jumped 29 percent following the April 20 announcement and traded at 0.420 percent the following day, the highest in more a year. It traded for 0.411 percent yesterday.

Canada’s annual inflation rate slowed in March to 1.4 percent from 1.6 percent the previous month, Statistics Canada said April 23, as clothing and mortgage interest expenses declined while gasoline costs rose.

The bank sets interest rates to keep inflation at 2 percent, and its April 22 economic forecast predicted price gains “slightly higher” than that mark over the next year.

Carney also told the House of Commons panel he expects a “marked slowdown” in the housing market, and that fiscal challenges abroad are a risk to the global recovery. He also reiterated that “persistent strength” in the Canadian dollar is a risk to economic growth and inflation.

Stewart Hall, an economist at HSBC Securities in Toronto, said the testimony hasn’t changed his view for a June 1 rate increase. “I would have a hard time coming to terms with why the Bank of Canada would drop its conditional pledge so near to its natural expiry if it did not intend to hike rates” he wrote in an e-mail message.

Millan Mulraine, an economist at TD Securities in Toronto, wasn’t as definitive. “There is still a very good chance of a 25 basis point hike but it’s not a 100 percent certainty.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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