Carney May Keep 1% Canada Rate While Dropping Language on Future Increases

The Bank of Canada will probably leave its main interest rate unchanged today and signal it will stay low for longer than policy makers previously anticipated, economists said.

Governor Mark Carney will hold the Ottawa-based central bank’s target for overnight loans between commercial banks at 1 percent, where it’s been since last September, according to all 27 economists surveyed by Bloomberg News. The decision is due at 9 a.m. New York time.

Slowing overseas demand and a strong currency are weighing on the world’s 10th largest economy, which depends on exports for one-third of its growth. At a special legislative hearing last month, Carney said Canada’s economic “headwinds” have increased, including Europe’s debt crisis and “subdued” consumer spending in the U.S.

“It’s going to be a dramatic shift compared to the communique in July,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto. He said the bank is likely to “pound the table” with the theme that rates will stay lower for longer. On July 19, Carney signaled rates would rise as the economy recovered.

The European Central Bank and the Bank of England have interest-rate decisions tomorrow, and economists predict the U.K. rate will remain 0.5 percent and the ECB’s at 1.5 percent. In the U.S., the Federal Reserve pledged on Aug. 9 to keep its benchmark rate at a record low at least through mid-2013 to revive a recovery that’s “considerably slower” than anticipated.

“Most central banks will be on hold for a long time,” said Mathieu D’Anjou, a senior economist at Desjardins Group in Montreal, who predicts no Canadian rate increase until July 2013. Desjardins is the country’s biggest credit union.

Inflation Target

The Bank of Canada’s mandate is to set policy aiming inflation at a 2 percent annual pace. Consumer prices rose 2.7 percent in July from a year earlier, the eighth month it was above target. The central bank also predicted in July that economic growth will accelerate in the second half of the year, a view Carney retained in last month’s testimony.

Canada’s jobless rate has fallen to 7.2 percent in July from a peak of 8.7 percent in August 2009, and employment has grown for four straight months. The country’s housing prices hit a record in June, the National Bank Teranet Home Price Index showed last week.

“It will take a much more severe degradation of economic activity to force the Bank’s hand to act,” said Mark Chandler, head of fixed-income strategy at Royal Bank’s Capital Markets unit in Toronto.

Swap Rate

Although no economist surveyed last week forecast a rate cut today, some investors are betting that way, with the three- month overnight index swap rate trading at 0.96 percent yesterday. The swap rate is a gauge of investor expectations for the average policy rate over that period.

Goldman Sachs Group Inc. said yesterday the Bank of Canada will cut the rate to 0.5 percent by the end of the year. Today’s statement will replace language about a rate increase with an “easing bias,” Andrew Tilton, an economist with Goldman Sachs in New York, wrote in a note to investors.

Bets on a rate cut increased after Statistics Canada reported Aug. 31 that the economy shrank at an annualized 0.4 percent rate, Brazil unexpectedly cut rates last week and Switzerland yesterday offered unlimited funds to cap a rise in the franc. In the U.S., which buys three-quarters of Canada’s exports, a report last week showed job creation stalled in August.

Caution on Spending

Companies such as aircraft and train maker Bombardier Inc. of Montreal say they are cautious about major new spending projects because of signs of global weakness. “We’ve been very careful in how we’ve been planning our capital expenditures,” Guy Hachey, the company’s chief operating officer for aerospace, said on an Aug. 31 earnings call.

Finance Minister Jim Flaherty said last week that Canada has more flexibility than the U.S. central bank. “With respect to the limited tools available given the rate presently in place by the Fed in the U.S., we have more room to move in Canada than there is to move in the United States,” Flaherty said Aug. 31 in Toronto.

Flaherty also said that the economy is “sound and sustainable,” and he doesn’t need major spending cuts to eliminate a budget deficit.

“The basic fundamentals of the economy haven’t disappeared,” said Dana Peterson, an economist at Citigroup Global Markets in New York. Monetary policy “is still extraordinarily accommodative.”

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