Carney May Keep Interest Rate Unchanged on Sluggish Growth: Canada Credit

The Bank of Canada may keep interest rates unchanged tomorrow and signal no move until at least March because of sluggish economic growth, even amid signs consumer prices are advancing faster than policy makers predicted.

Governor Mark Carney will keep the target overnight rate for overnight commercial bank loans at 1 percent in a decision due at 9 a.m. New York time tomorrow, according to all 24 responses in a Bloomberg News survey. The 1.03 percent yield on three-month overnight index swaps also suggests no change at the following meetings in January and March.

Canada’s economic growth slowed to a 1 percent annualized third-quarter pace, less than the central bank’s 1.6 percent prediction, as imports rose and exports declined. That hasn’t slowed inflation -- the latest report said consumer prices advanced at a 2.4 percent annual pace in October, the fastest in two years.

“The nice thing about the Bank of Canada is they don’t rush into things, they don’t react to single pieces of data,” said Jeff Herold, who helps oversee C$2.5 billion ($2.5 billion) as lead fixed-income manager at J. Zechner Associates Inc. in Toronto. “It won’t push them to do something unless inflation moves higher again and stays higher.”

Since the central bank’s Oct. 19 meeting, Canadian government bonds have lost investors 1.68 percent, according to the Bank of America Merrill Lynch index, which tracks 31 bonds sold by the federal government.

Three-Year Auction

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian corporations rather than its federal government widened 1 basis point Friday to 143 basis points. Spreads reached 134 basis points on Nov. 15, the narrowest since May 10. Yields fell 3 basis points to 3.99 percent.

Relative yields on provincial bonds widened one basis point to 54 basis points on Friday from the day before, according to Bank of America Merrill Lynch data. Spreads were as low as 51 basis points last month and as high as 54. Yields fell to 3.27 percent on Friday.

Canada will auction C$3.2 billion of three-year bonds on Dec. 8. The securities mature in March 2014. The previous auction of three-year bonds, held on Aug. 4 drew an average yield of 1.891 percent and a bid-to-cover ratio of 2.78 times.

Trinidad Drilling Ltd., the Canadian drilling contractor, may sell $450 million of eight-year U.S. dollar denominated notes as soon as this week, according to a person familiar with the transaction. The senior unsecured debt may be non-callable for four years, said the person, who declined to be identified because terms aren’t set.

Economic Slack

Half the gain in October inflation came from gasoline costs. Inflation will probably recede to a 2.1 percent pace in the first three months of next year, according to a separate Bloomberg survey.

The central bank “looks at where CPI will be 18 months out and steers interest rates between now and then to aim at a 2 percent inflation rate at that point,” Avery Shenfeld, chief economist at CIBC World Markets in Toronto, said in a telephone interview.

Shenfeld said the Bank of Canada focuses on so-called core inflation, which excludes the most volatile components, to gauge what prices are doing in the short-term. “Given the degree of slack in the economy, the bank will likely assume that the monthly core CPI numbers will stay quite tame.”

Core inflation accelerated to 1.8 percent in October, according to Statistics Canada. It’s been below 2 percent since March.

More Protection

Some bond investors are demanding more protection against inflation. The so-called breakeven yield on 10-year bonds that is a gauge of inflation expectations was 2.31 percent on Dec. 2, the highest since May. Today, the yield was 2.30 percent at 12:15 p.m. in Toronto.

The breakeven yields in Canada reflect the relative scarcity of real-return bonds compared with regular debt, Herold said. Canada on Dec. 1 auctioned C$700 million of 30-year real- return bonds, drawing a median yield of 1.07 percent.

The yield on the 3.5 percent bond due in June 2020 fell 4 basis points today to 3.14 percent. Last week, the yield rose 7 basis points, and is up 33 basis points since the start of November.

“In the very near term the bond market has captured a lot of bad news,” and has “probably gone too far,” said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada in Toronto.

Canadian 10-year bond yields may decline by 10 to 20 basis points over the next month or so, Chandler said. The Bank of Canada may not raise interest rates until April and the U.S. Federal Reserve’s plan to purchase another $600 billion of assets to keep interest rates low will influence Canadian bond yields, he said.

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