Carney Says Canada, U.S. Can't Diverge Too Far, Fed May Act on Inflation
Bank of Canada Governor Mark Carney said there is a limit to how far his country’s monetary policy can stray from its U.S. counterpart, and economists said he may pause raising interest rates if the U.S. Federal Reserve eases its policy.
Speaking in a CNBC Television interview today, Carney said the “debt overhang” in the U.S. is “pushing inflation to very low levels, and it may necessitate a Fed response.”
“There are limits to the divergence that there can be between Canada and the United States,” Carney said. “So the renewed weakness in the United States, if it prompts quantitative easing or other action by the Fed has been discussed, then we deal with the direct consequences.”
The Bank of Canada raised its policy interest rate a quarter point to 1 percent on Sept. 8, the third increase this year, and said the country’s recovery will be “slightly more gradual” than it expected earlier this year because of U.S. weakness. Monetary conditions remain “exceptionally stimulative,” the bank said, and further interest rate increases will need to be “carefully considered” given “unusual uncertainty” surrounding the outlook.
An easing of monetary policy in the U.S. would lead to a stronger Canadian dollar, “and the resulting disinflationary drag would see Governor Carney raising rates more slowly than would otherwise be the case,” Avery Shenfeld, chief economist with Canadian Imperial Bank of Commerce, said in a note to clients.
‘Firing on All Cylinders’
Fed officials indicated at their June meeting that they prefer long-run inflation ranging from about 1.7 percent to 2 percent. That’s based on the Commerce Department’s personal consumption expenditures price index. The index rose 1.5 percent in the 12 months ended July. Excluding food and energy costs, it rose 1.4 percent.
Carney said Canada’s financial system is “firing on all cylinders” while low interest rates have encouraged borrowing. Carney said he’s concerned about the level of consumer borrowing in his country.
“With exceptionally low rates, Canadians have seen fit to borrow, consume and buy housing,” Carney said. “We are concerned about the level of household borrowing in Canada, yes.”
Economists estimate the Canadian economy contracted 0.1 percent in July, based on the median of nine estimates in a Bloomberg Survey. The growth data will be released by Statistics Canada on Sept. 30.
Carney said he expects more movement from China regarding the yuan level, which has become a target for U.S. criticism.
“Currency flexibility up until now has been a slogan, not a reality,” Carney said. “We expect China to increase the flexibility of the currency in due course.”
To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net; Alex Kowalski in Washington at akowalski13@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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