Carney Likely to Keep Canada Benchmark Rate at 1% Amid Threats to Recovery
Bank of Canada Governor Mark Carney
Tomohiro Ohsumi/Bloomberg
Mark Carney, governor of the Bank of Canada.
Mark Carney, governor of the Bank of Canada. Photographer: Tomohiro Ohsumi/Bloomberg
The Bank of Canada will probably keep its key interest rate unchanged today, and may say a strong currency and Europe’s sovereign debt crisis are threatening a domestic recovery that has been faster than they projected.
The target rate for overnight loans between commercial banks will remain at 1 percent, where it has been since September, according to all 28 economists surveyed by Bloomberg News.
While Governor Mark Carney and policy makers at the Ottawa- based central bank may raise their estimate of economic growth for this year from a January forecast of 2.4 percent, they may also highlight new and continuing threats to Canadian exports. Since the bank’s last decision on March 1, Portugal has sought a fiscal rescue and Japan was hit by an earthquake and tsunami.
“The bank has to be concerned with some of the potential downside risks to international growth,” said Derek Burleton, a senior economist at Toronto-Dominion Bank, who predicts a July rate increase. “They are going to signal they aren’t quite prepared to raise rates,” he said in a telephone interview from Vancouver.
Raising rates while the U.S. Federal Reserve is continuing to stimulate the economy with its $600 billion bond-purchase program could also further boost the Canadian dollar, threatening the country’s exports and economic expansion.
“The strength in the Canadian dollar is disinflationary and then it also does some of the bank’s work on tightening growth conditions for them,” said Derek Holt, an economist at Bank of Nova Scotia in Toronto.
Election Campaign
The decision is Carney’s first as governor during the campaign for the May 2 federal election. Economists such as Doug Porter, deputy chief economist with BMO Capital Markets in Toronto, and former bank advisers including Angelo Melino of the University of Toronto, said this gives Carney a reason to avoid a major shift in language today.
“They will leave the door open for a move without signaling it directly,” said Porter, who predicts a July increase.
Prime Minister Stephen Harper called an election after opposition parties passed a non-confidence motion last month. The economy has been a major issue in the campaign, with Harper saying his Conservatives will protect a “fragile” recovery with tax credits for companies that create jobs. Liberal Leader Michael Ignatieff says he will reverse past and planned tax reductions that have benefited companies like Royal Bank of Canada (RY) and Suncor Energy Inc., opting to create jobs through social spending.
Inflation
Carney and his five deputies set monetary policy to keep inflation at 2 percent. The consumer price index rose at an annual pace of 2.2 percent in February after rising 2.3 percent in January. Excluding eight volatile items such as gasoline, inflation slowed to a record low 0.9 percent pace in February as the cost of hotels dropped following last year’s Vancouver Olympics, Statistics Canada said March 18.
Gross domestic product in the world’s 10th-largest economy expanded 0.5 percent in January, the fourth straight gain, led by a surge in manufacturing. Canada unexpectedly lost jobs in March after five prior increases, as a record drop in part-time work outstripped the biggest rise in full-time positions in a year.
Investors and economists are betting the recovery is durable enough for interest rates to rise in the next few months. The bank’s policy interest rate will be 1.5 percent at the end of the third quarter, according to economists surveyed by Bloomberg. The yield on the six-month overnight index swap rate, which is tied to forecasts for the Bank of Canada’s policy rate, advanced to 1.1763 percent in Toronto yesterday, the highest since December 2008.
ECB Rates
The European Central Bank last week lifted the benchmark from a record low of 1 percent, where it had been since May 2009, and President Jean-Claude Trichet said officials hadn’t decided on a series of increases after inflation accelerated to 2.6 percent, versus a target of keeping it below 2 percent.
Canada’s currency appreciated on April 8 to the strongest level since November 2007 against its U.S. counterpart as crude oil, the nation’s largest export, rose above $113 a barrel for the first time since 2008.
Some Canadian exporters are shrugging off the currency’s strength and benefitting from a rebound of demand in the U.S., Canada’s biggest trade partner. Westport Innovations Inc. in Vancouver said April 5 it won an order from Heckmann Corp. of Palm Desert, California, to change 200 Peterbilt trucks that run on diesel fuel into ones that use natural gas instead.
Those kinds of orders may help close the so-called output gap between what the economy is producing and its potential output. The bank said in January the gap wouldn’t close until the end of next year.
“We are definitely dealing with an environment where the output gap is closing faster than the Bank of Canada has been forecasting,” Holt said. “I just don’t see a compelling case for the Bank of Canada to change its tune just yet.”
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net
To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net
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