Carney May Keep Canada Lending Rate 1% on Threats to Recovery

The Bank of Canada will probably keep its key interest rate unchanged today and may emphasize the risks to Canada of a strong dollar and uneven global growth rather than give hints on the timing of the next tightening.

The target rate for overnight loans between commercial banks will remain at 1 percent, where it has been since September, according to all 24 economists surveyed by Bloomberg News. The decision is due at 9 a.m. New York time.

Canada’s announcement will be followed in June by policy makers from the other Group of Seven nations, starting with the European Central Bank and Bank of England June 9. Governor Mark Carney led the group with three increases last year before pausing to judge the strength of the world economy. Last month, the Bank said growth may slow in the April-June period to half the 3.9 percent pace seen in the first quarter as indebted consumers and governments pull back and auto production slows on disruptions linked to natural disasters in Japan.

“That’s the appropriate thing for the bank to do, to remain vague, because it’s a very unusual environment,” said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal. “I wouldn’t expect to be able to point to anything” about the precise timing of future increases, he said.

“Any further reduction in monetary policy stimulus would need to be carefully considered,” the bank has said in every interest rate announcement since September.

Slower Than Forecast

Trading in swaps contracts showed investors on balance began betting a rate increase wouldn’t happen until October following a May 20 report that showed inflation was slower than economists forecast. The central bank sets interest rates to aim inflation at the 2 percent midpoint of a 1 percent to 3 percent target band.

Gross domestic product in the world’s 11th-largest economy expanded at a 3.9 percent annualized pace between January and March, Statistics Canada said yesterday. The Bank of Canada said last month growth is likely to slow to a 2 percent annual pace in the April-June period, and that the rise in inflation to 3.3 percent in March and April was driven by temporary factors such as higher taxes and food and energy costs.

U.S. Federal Reserve Chairman Ben S. Bernanke has also said in recent speeches that the threat from accelerating prices will prove “transitory.” Central bankers there are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasuries by the end of June.

Economists surveyed by Bloomberg predict no move by the Fed until the first quarter of next year, and that the Bank of Canada will raise its rate at its Sept. 7 meeting. The European Central Bank raised rates in April for the first time in almost three years to 1.25 percent.

Currency Strength

Canada sends about 75 percent of its exports to the U.S., and those shipments are at risk as the Canadian dollar rallied to 94.46 cents on April 29, the strongest since November 2007, Carney has said. The currency traded for 97.71 cents per U.S. dollar late yesterday in Toronto.

Exports may be curbed “for some time” by weak U.S. demand and a loss of competitiveness by companies who haven’t done enough to develop sales in emerging markets, Carney said in a May 16 speech. The Canadian dollar could also strengthen as global investors seek “proxies” for emerging-market assets and other countries impose exchange-rate restrictions, posing further obstacles for exporters, he said.

Trade was a drag in the first quarter as imports rose faster than imports, even as shipments abroad of energy rose 8.9 percent, Statistics Canada said yesterday. Consumer and government spending were both flat after previous gains, which economists said suggests weaker future growth momentum.

‘Cautious Approach’

“The number of international headwinds faced by the Canadian economy, in combination with a marked deceleration in domestic demand are strong arguments for the Bank of Canada to take a cautious approach with monetary tightening,” said Diana Petramala, an economist at Toronto-Dominion Bank, in a note to clients.

Prime Minister Stephen Harper won a May 2 election with his first majority of seats in Parliament since first taking power in 2006, and Finance Minister Jim Flaherty presents a June 6 budget with a plan to eliminate a budget deficit by 2014. He advanced that deadline by a year during the election campaign, saying the government could find C$4 billion a year in program spending reductions.

There are signs that business spending and investment, which boosted growth in the first quarter, may sustain Canada’s recovery.

ArcelorMittal, the world’s largest steelmaker, said May 20 it will spend C$2.1 billion to raise iron ore output 71 percent at its Quebec operations by 2013. The project will create 8,000 jobs during construction and 900 permanent jobs afterwards, the company said.

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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