Carney May Suspend Canada Interest Rate Increases on U.S. Recovery Concern

The Bank of Canada may keep its benchmark interest rate unchanged after three previous increases because of slowing domestic growth and as other central banks, including the U.S. Federal Reserve, consider action to further stimulate their economies.

Governor Mark Carney will keep the target rate for overnight loans between commercial banks at 1 percent in a decision due at 9 a.m. New York time today, according to all 18 economists surveyed by Bloomberg News. The Ottawa-based bank may also cut its growth and inflation forecasts before presenting a detailed outlook tomorrow, economists said.

Carney said last month he should be “cautious” about further rate increases and there were “limits” to how far he could diverge from the Fed, where Chairman Ben S. Bernanke said Oct. 15 that he may offer new stimulus measures. If Carney raised interest rates while other central banks are on hold it could boost the currency, hurting exporters at a time when domestic demand is weakening.

“They are going to go with the flow” of other central banks that are avoiding tighter policies, said Robert Kavcic, a Bank of Montreal economist in Toronto.

By pausing, Carney would join central bankers in Brazil, Malaysia and Australia in keeping borrowing costs unchanged in part to gauge the strength of the recovery, even though Canada is benefiting from rising global demand for commodities. Policy makers at the European Central Bank and the Bank of England have also signaled they may introduce new stimulus.

Hands Tied

“The hands of central banks around the world are being tied by the actions of the Fed” and other major central banks contemplating new easing, said Derek Holt, economist at Bank of Nova Scotia in Toronto.

Canada relies on the U.S. for 63 percent of its trade, and the country’s dollar reached parity with its U.S. counterpart last week for the first time since April. That puts fresh pressure on exporters hurt in the global recession by lost U.S. orders of manufactured goods such as autos and paper.

“I would look for more neutral language than anything leaning towards a rate hike,” in today’s statement, said Jonathan Basile, a Credit Suisse economist in New York. “If you hinted you are still thinking of raising rates the currency is going to keep appreciating.”

Forest-product maker Canfor Corp. and U.S. Steel Corp., the second-largest U.S. maker of the metal, have said they are shutting plants because of reduced demand. Canfor said Sept. 22 it will close a mill near Prince George, British Columbia in part because of “the protracted downturn in new home construction in the U.S.” The mill employed about 185 people.

Extended Pause

The Canadian dollar traded for C$1.0144 per U.S. dollar yesterday, bringing its gain for the year to 3.8 percent.

The bank may not raise rates again for six months, overnight index swaps indicate. The rate on the six-month security, a gauge of what investors think the policy rate will average over that time, was 1.095 percent yesterday, down from 1.175 percent Sept. 16.

Carney said in a Sept. 30 speech he would cut his growth forecast for the second half of the year this week. Economists surveyed by Bloomberg predict the economy grew at a 2.2 percent annualized pace in the third quarter, less than the central bank’s July prediction of 2.8 percent.

Canada’s gross domestic product shrank 0.1 percent in July, the first decline in 11 months, as retailers, manufacturers and builders posted declines, according to Statistics Canada.

‘Looking Weaker’

“Everything has come in weaker than we thought,” Nicholas Rowe, an economics professor at Carleton University in Ottawa, said in an interview last week. “The Canadian economy is looking weaker.”

Monetary policy may become the chief tool to boost the recovery with Finance Minister Jim Flaherty saying his two-year stimulus spending package will end in March. Opposition leaders such as Jack Layton of the New Democratic Party have said the government should extend some of the measures.

Keeping interest rates low is probably a better way of boosting demand than government spending, said Glen Hodgson, chief economist at the Conference Board of Canada in Ottawa.

“It’s a rough road right now,” he said. “The bank clearly has to be mindful of the external environment.”

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

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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