Bank of Canada Keeps Key Lending Rate at 1% on Weak Exports, Global Risks

The Bank of Canada will probably keep its benchmark interest rate at 1 percent for a second consecutive time and say it will remain careful about future increases as falling exports slow the economic recovery.

Governor Mark Carney will keep the target rate for overnight loans between commercial banks unchanged in a decision scheduled for 9 a.m. New York time today, according to all 24 economists surveyed by Bloomberg News.

Economic growth slowed to a 1 percent annualized third- quarter pace, less than the bank’s 1.6 percent prediction, as exports fell and imports rose. The bank may say that any rate increases would be “carefully considered,” echoing its Oct. 19 statement, and note the “drag to the economy” from trade, said Charles St-Arnaud, an economist and currency strategist at Nomura Securities International.

“The tone will again be on the dovish side,” he said in a telephone interview from New York. “There isn’t much to be bullish about since the last meeting,” St-Arnaud said, adding “the weakness in exports was really dramatic.”

The U.S., Japanese and European central banks are still relying on asset purchases to revive demand and are keeping their interest rates close to record lows. Companies such as Montreal-based Bombardier Inc., the world’s third-biggest planemaker, are being hurt by weaker global orders.

Investors have priced in just a 4 percent chance of a rate increase, according to a calculation by Credit Suisse based on overnight index swap rates.

Falling Exports

Canada’s economy grew at a 5.6 percent pace in the first quarter of this year, boosted by government stimulus and housing. By the third quarter, the drag from trade slowed Canada’s expansion to less than half the 2.5 percent in the U.S. Canada’s central bank led the Group of Seven earlier this year with three rate increases from June through September.

Exports, which equaled 32 percent of Canada’s economy in 2009, declined by 1.3 percent between July and October, Statistics Canada said Nov. 30. About three-quarters of those shipments went to the U.S. last year. Imports of goods and services rose 1.6 percent.

The Canadian dollar has strengthened 28 percent against the U.S. dollar since March 2009, curbing exports by companies such as forest-products firm Tembec Inc. and encouraging companies to import equipment to boost productivity.

Trade will subtract 1.9 percentage points from Canada’s economic growth rate this year, and add 0.3 percent in 2011, the Bank of Canada predicted in October.

Deadline Extended

Prime Minister Stephen Harper last week extended a deadline for construction linked to government stimulus money by seven months to Oct. 31, and said that he was concerned about a “fragile” global recovery.

The European Central Bank increased its bond purchases last week after President Jean-Claude Trichet pledged to fight “acute” financial market tensions. U.S. Federal Reserve Chairman Ben S. Bernanke said Dec. 5 it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month.

“It’s the worries about ongoing volatility in the debt and foreign exchange markets that would support some caution in terms of communicating interest rate hikes,” said Derek Burleton, a senior economist at Toronto-Dominion Bank in Toronto, who predicts no rate increase until July.

There are signs domestic spending is still gaining, including a report last month showing inflation advanced at a 2.4 percent annual pace in October, the fastest in two years. Burleton said that gain, half of which came from gasoline costs, was probably a “blip.” The bank sets interest rates to keep inflation at 2 percent.

The Bank of Canada should extend its stimulus as the federal government has done, said Mike Pratt, president of the Canadian unit of Best Buy Co., the world’s largest consumer- electronics retailer.

“Anyone looking to fuel more demand and consumer confidence would hope that the Bank of Canada keeps interest rates low in sync with the stimulus extension timetables that were just announced” by Harper, Pratt said.

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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