Canada Raises Key Rate, Cuts 2010-11 Growth Forecasts
Mark Carney, governor of the Bank of Canada, speaks during an interview in New York. Photographer: Daniel Acker/Bloomberg
The Bank of Canada increased its benchmark lending rate for a second month, and said economic growth will be slower through next year, giving policy makers more leeway in deciding how fast to raise rates.
Governor Mark Carney raised the target rate for overnight loans between commercial banks a quarter point to 0.75 percent, a decision expected by all 20 economists surveyed by Bloomberg News. At the same time, he cut the growth forecast to 3.5 percent from 3.7 percent for this year and to 2.9 percent from 3.1 percent for 2011, according to a statement today from the Ottawa-based bank.
Carney has led his colleagues in the Group of Seven with rate increases as Canada’s economic growth and job creation rebound faster from last year’s global recession. The bank may stop raising rates later this year as evidence mounts that the recovery is waning, economists said.
“The bank has more wiggle room” with today’s statement, said Sherry Cooper, chief economist at BMO Capital Markets in Toronto. “The Canadian economy seems to be slowing now.”
Since recording a 6.1 percent annualized growth rate for the first quarter, reports have shown economic growth stalled in April while the bank said June 21 that global financial strains have increased since the end of last year.
Canada’s dollar rose 0.3 percent following the report, trading at C$1.0514 per U.S. dollar at 11:33 a.m. in Toronto, compared with C$1.0549 yesterday. One Canadian dollar buys 95.11 U.S. cents. The six-month overnight index swap rate, which measures what investors predict the bank’s policy rate will average over that period, rose 2 percent to 0.9050 percent.
Longer to Capacity
Policy makers also said the economy won’t be operating at its full capacity until the end of next year, six months later than predicted in April. The growth forecast was increased for 2012, to a 2.2 percent expansion from 1.9 percent. The central bank will release a quarterly economic forecast paper on July 22 followed by a press conference by Carney.
“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the central bank’s statement said, repeating a phrase used in the June 1 rate increase.
“The same language in June didn’t preclude a rate hike in July, investors shouldn’t be surprised if the Bank of Canada carries forward with rate hikes in September and October,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto. “Odds are that by December they will have seen enough of a slowing to stay on hold for a while.”
U.S. ‘Uneven’
European governments have taken steps to lower the chance of “an adverse outcome” from the continent’s debt crisis, which will slow global growth, the Bank of Canada said. Private spending in the U.S., Canada’s biggest trade partner, is “picking up but remains uneven,” the bank said.
Ireland yesterday had its credit rating cut one level to Aa2 by Moody’s Investors Service, which cited a “significant loss of financial strength” and the cost of bank bailouts. In the U.S., consumer confidence fell in July to the lowest level in a year, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment.
“The global economic recovery is proceeding but is not yet self-sustaining,” the bank said. Slower growth abroad, and reduced domestic consumer spending, will cut Canada’s economic growth. Today’s rate increase “leaves considerable monetary stimulus in place” and both core and total inflation will advance at about a 2 percent annual rate through 2012, the bank said.
Cooler Housing
The U.S. Federal Reserve and the European Central Bank will keep their key rates at record lows this year, according to Bloomberg economist surveys, and the Reserve Bank of Australia signaled July 6 it’s prepared to refrain from further increases in coming months as signs mount that economies around the world will slow.
Canada’s housing market, which helped lead the country out of recession last year, has cooled. Housing starts fell for a second month in June, and building permits fell 10.8 percent in May.
“Housing activity is declining markedly from high levels, consistent with the Bank’s view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010,” the statement said.
Executives at Canadian auto-parts maker Linamar Corp. and electricity producer TransAlta Corp. say Carney should remain cautious about rate increases to sustain a shift from an expansion led by government stimulus to one led by private spending. Finance Minister Jim Flaherty has said he’s ending the second year of emergency stimulus next March.
“You are seeing so many companies being conservative with their cash right now,” Linda Hasenfratz, Linamar’s chief executive officer, said in a July 9 telephone interview. “I don’t think you want to do anything rapidly, you want to be cautious in potentially uncertain times.”
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.
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